Alrighty … the last time we chatted, I told you about how Kris Sayce, Chris Tate and I were on the brink of unraveling exactly what makes successful traders earn 80% of the profits. No – it’s not sexy, and it won’t win ‘the most beautiful baby award’, but to become an ultra-versatile power trader, it’s clear that you need to do two things…
You need to set a stop loss, and you need to stick to it. This is a huge commonality of all brilliant traders, and it’s a skill you’ll need to cultivate if you intend on scooping up outrageous profits.
In this article, I’m going to tell you how to set a stop loss, and how to stick to it. If you’re determined to grab the rewards you deserve, rather than catch the mere dribbles that the professional traders are willing to spit your way – then pay close attention to what I’m about to reveal.
How to Set Stops
There are four main ways to set a stop loss level:
- Pattern based stop loss traders will exit trades if the share breaks downwards through a trend-line for example, or a significant line of support.
- Technical indicators can be used as a stop, for example, a dead cross of two moving averages may trigger an exit.
- Percent drawdown or retracement methods suggest that if the instrument drops in value by a set percentage eg 7%, then an exit should be made.
- Volatility based stops rely on significant changes in volatility past a pre-defined level in order to trigger an exit.
Whichever method you choose, the key is to actually set a stop loss and to never deviate. You can either manually exit your trade based on your stop loss being hit, or use the services of a broker that offers an automatic stop loss service.
Many traders make a litany of excuses as soon as their stops are hit. They may say:
- “Well, the share went ex-dividend. Of course it will drop through support in that situation…”
- “I’ll give the trade just one more day, it’s likely to recover tomorrow”
- “It can’t get much worse”
- “I knew that it would take a while for this trade to be profitable. I’ll just sweep this one under the carpet and be a
long-term holder. Shares like this always ultimately trend upwards.”
Now if any of these excuses sound familiar, please don’t tell me about it, because I’ll be forced to hunt you down and throttle you! When your stop is triggered, exit the trade. Refuse to accept any excuses. It is always possible to re-enter at a later date. Don’t hold a grudge against the share because it mistreated you. It doesn’t know that you exist. The battle that you are fighting is within your own mind. The sharemarket is not your enemy.
What Next?
The first step is to review your existing portfolio. Take a close look at where you have set your stop losses, and make sure that these levels are consistent with your trading plan. If your stop is hit, exit immediately. Do not ‘hope’ that your shares will recover. Traders tend to hold onto shares that are trending down, yet prematurely sell shares that are trending up.
This trait will ensure that you will stay amongst the mediocre masses and never fight your way to the top of the class.
I know you deserve more than this. Develop a ruthless quality when it comes to taking a loss. To quote Chin-Ning Chu, “The killer instinct is not solely reserved for the vicious and cunning; it can benefit the virtuous and righteous as well”.
In five years time, your life could look very different from the way that it does today. What decisions are you currently making that will affect the shape of your life in the years to come? If you really focus on developing and practicing your trading skills, what will this mean to you in the future?
Now that you’re motivated to really immerse yourself in your own trading education, it’s just a matter of time before you get to test out your theories. You’re about to begin the biggest, and potentially most lucrative, education of your life.
I’m dedicated to making your trading journey an easy one. The best way I can help you right now is to give you a special gift. I’ve prepared a ‘Trading Plan Template’ to help you achieve your goals out of trading the sharemarket. Let me know that you’re ready to become an exceptional trader by registering your details on my website www.tradingsecrets.com.au, right now, and I’ll send you your very own FREE template straight away.
Now, go out there and make me proud!
Louise Bedford
for Money Morning Australia