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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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The more you let your emotions get the best of you, the less likely you are to make moneyTHE USE OF STOP ORDERS I think any trader, no matter how good their discipline is, should be using stop orders. In all my years, Ive never met a successful off-the-floor trader who didnt use stop orders. It will definitely help you act in your own best interest more often than not. Whenever I initiate a position from off-the-floor, I always make sure I have a stop order in to protect myself. I highly suggest all off-the-floor traders also use stop orders to protect themselves and their open positions. I cant tell you how many times Ive spoken to off-the-floor traders whove failed to use a stop order and then lost 20-25% of their account in a single trade with only one contract (in the S&P 500 Futures). The more you trade, the more you realize what a big part emotional discipline plays in your trading. Like Ive said before, being successful really has more to do with acting in your own best interest than it does the technical method or system youre using, which is precisely the reason using stop orders will be so important to your trading. It really surprises me when I hear people say, I hate using stop orders! Stop orders are the off-the-floor traders best friend. As we talked about earlier, protecting yourself and acting in your own best interest is the only way to be profitable. Using stop orders to protect your trades allows you to be a little less emotionally involved in your trades. And, as we know, the more you let your emotions get the best of you, the less likely you are to make money. Some people dont want to use stop orders when trading. For some strange reason, they get caught up in thinking that the market will hit their stop order and then immediately start moving in their direction after theyre stopped out. And you know what? This will happen sometimes. For people who attempt to use mental stops (where theyll just call and get themselves out of the market instead of putting the stop order in the market), the problem comes up when the market does go through their mental stop order, then reverses and starts moving back in their direction. Usually, these people are at a loss of what to do next. And the unfortunate thing is it usually costs them a lot of money, as they do not act in their best interest. They let a losing trade turn into a huge losing trade. The biggest reason people dont want to use stop orders is because they cant or wont admit they were wrong about which way they thought the market was going. This is about the worst trait you can have. There is nothing wrong with having a manageable losing trade. The difficulty comes in when your losing trades are unmanageable. This can easily happen because you take too much risk on a particular trade by not using a protective stop order. I think these people are under the impression if they dont get out of the market (by not using a stop order), they cant take a loss because the market can always come back. That idea is attractive to some because it can actually happen like that. The market can come back, no matter how far it was once against you. But Im telling you, you are asking for a disastrous situation. If you want to act in your own best interest, you will not let yourself get into a situation like that in the first place. It happens all the time. I talk to people who only planned on risking 200 points on an S&P trade. They didnt use a stop order, and because they didnt have their best interest in mind, they have a trade that is 600-800 points against them, and theyre hoping and praying the market comes back. Hoping and praying is not acting in your own best interest. I guarantee you that! About the only way I know to be a successful off-the-floor trader is to have your stop order in place and let the floor broker get you out of the market if youre wrong. Again, small manageable losing trades are fine. They are part of every successful traders day. If you think you can avoid them, youre wrong. And if you think you can avoid them by not using stop orders, in my opinion, you should just save your money and not even trade. That is just my opinion, but Ive been around for a while and Ive seen a lot of traders try to trade without stops. Trailing Stop Orders Another way you should be acting in your own best interest is to trail your stop orders to lock in profits in your trades. There are thousands of different ways in which to trail your stop orders as the market moves in your direction, but we wont get into all those here. The main thing Id like you to understand is why its so important to trail your stop orders. When you get some decent profit in your trades, youll want to trail your stop order, first to break-even, and then to hopefully lock in some profit in the trade. This is a very important thing to do. Without doing this consistently (no matter what timeframe youre trading), you will not be successful. As soon as I get decent profit in a trade, I want to move my stop to break-even. In other words, if Ive got a few hundred dollars profit in a (S&P) trade, Ill move my stop to the same price where I got in the market. Thus, if the market starts to come back and take away my profits, about the worst that will happen is Ill scratch the trade, or only lose a few ticks. But, if I hadnt moved my stop to break-even, then not only would the market have taken away the small profit I had, but I could also end up with a loss in the trade. One of the hardest things to deal with (emotionally) in trading is when youve had a decent profit in a trade and then end up losing money on that trade. This can be very frustrating for an off-the-floor trader. It causes you to make dumb decisions because it is emotionally draining. This is why I think its so important to avoid (as much as possible) getting yourself in these situations in the first place. If you can consistently trail your stops to break-even once you get some decent profit in them, you will be a lot better off. You will avoid turning winning trades into losing trades (which is the biggest reason off-the-floor traders fail to be successful). Whenever I tell people about how important it is to move their stop to break-even, I always get some people telling me that if they left their stop alone, they wouldnt have gotten stopped out and the market would have gone their way. Basically, they are saying that by moving their stop to break-even, they got stopped out. But if they had left their stop in the original place, they wouldnt have gotten stopped out and the market would have gone their way. Do you know what I say to that? So What!!! That will happen sometimes. But many more times you will end up scratching the trade instead of taking a loss. And that is how you protect yourself. In this business, protecting yourself and acting in your own best interest is so much more important than taking a chance. Its not even close. I cant stress that enough. In this business, protecting yourself and acting in your own best interest is so much more important than taking a chance. Its not even close. I cant stress that enough. And remember, the same idea is true when the market continues to move in your direction. Youll want to continue to trail your stop order as the market continues to move your way. Again, people are afraid of getting stopped out and then having the market continue to go in their direction. That will happen sometimes. But that is what having yourself protected is all about. You must concentrate much more energy on keeping yourself out of trouble (in other words, out of losing trades that were winning trades at one time). If you keep yourself out of the bad losing trades, the winning trades will come. |
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