Sunday, August 28, 2011

How to Execute Stops

Once you've done your homework and created an awesome trade plan that includes a stop out level, you now have to make sure that you execute those stops if the market goes against you.

There's two ways to do that. One is by using an automatic stop and another through a mental stop.
Which one is best suited for you?


If the market has reached your stop, your reason for the trade is no longer valid and it's time to close it out... No questions asked!

This is why the almighty forex gods invented limit orders. New traders should always use limit orders to automatically close out a losing trade at predetermined levels.

This way you won't give yourself the chance to doubt your plan and make a mistake. You won't even have to be sitting in front of your trading station to execute the order.

How awesome is that?!

Of course, the more trades and experience you have under your belt, the more you will hopefully have a better understanding of market behavior, your methods, and the more disciplined you will be.

Only then would mental stops be okay to use, but we still HIGHLY recommend limit orders to exit the majority of your trades.

Manually closing trades leaves yourself open to making mistakes (especially during unforeseen events) such as entering the wrong price levels or position size, a power outage, a coffee binge induced bathroom marathon, etc.

Don't leave your trade open to unnecessary risk so always have a limit order to back you up!
Because stops are never set in stone and you have the ability to move them, we will end this lesson with the "do's and don'ts" of moving your stop.

Trader crying after stopping out
  1. Don't let emotions be the reason you move your stop. Like your initial stop loss, your stop adjustments should be predetermined before you put your trade on. Don't let panic get in the way!
  2. Do trail your stop. Trailing you stop means moving it in the direction of a winning trade. This locks in profits and manages your risk if you add more units to your open position.
  3. Don't widen your stop. Increasing your stop only increases your risk and the amount you will lose. If the market hits your planned stop then your trade is done. Take the hit and move on to the next opportunity. Widening your stop is basically like not having a stop at all and it doesn't make any sense so to do it! Never widen your stop!

These rules are pretty easy to understand and should be followed religiously, especially rule number 3!

Want us to repeat it again?


Always remember to plan your trade ahead and figure out what to do in each scenario so that you won't panic and do something you'd probably regret later on.

Do you like this post?


Post a Comment

Related Posts with Thumbnails