I once heard the saying: “A monkey can enter a trade, but money is made (and lost) when you EXIT it.”
This couldn’t be truer. Most traders are right about the direction of the market when they enter a trade, but they end up taking a loss because they fail to capture profits at the right time.
In order to avoid this type of situation, it’s crucial that you establish exit signals. And one of the most effective exit signals is a stop loss.
A stop loss is used to limit the potential loss if the trade goes against you. It’s the level at which you’ll close a trade on the basis that it has gone too far in the 'wrong' direction, and, therefore, negated the reason for you being in that trade.
Always use stop losses!
If you don't apply stop losses in your trading, you won't be trading for long – you’ll end up wiping out your trading balance in no time. It can be too easy for a $300 loss to become a $5,000 loss. A good trader will know when to take a small loss and go on to the next trade.
Even the most experienced traders use a stop loss order in the market, whether they’re trading forex, futures, options, or even stocks.
Remember that your trading capital is your business – if you burn it, there’s no insurance. You’re done. Once you’ve entered a trade, immedi¬ately place a stop. This safeguards you from losing your entire account.
The most important thing, regardless of how you approach the decision, is to know where you’ll cut a losing position BEFORE entering the trade. Set the rules and ALWAYS follow them.
Knowing HOW and WHEN to exit a trade will ulti¬mately determine your success or failure as a trader.
Author’s Bio:
Markus Heitkoetter is the CEO of Rockwell Trading, Inc. and the author of “The Complete Guide to Day Trading.” Loaded with easy-to-use information, proven and reliable trading strategies, and clear-cut guidelines to success, the result of this book is a practical hands-on approach to day trading. Check it out at www.thecompleteguidetodaytrading.com. |
Added: Wed May 14, 2008 6:59 am GMT 