Losing to Succeed?

You have to consider each situation and your method of trading to see whether you should put your stop loss order in the market. Whether or not you do, you should always know the price point at which you can safely assume that the trade has failed, and should cut your losses. One of the difficult ideas for novices is that this can be thought of as a successful trade.

Think about it, no trading plan or system is going to produce 100% wins, in fact if your system makes as much as 70% good calls it is doing better than many profitable systems. You can even lose as often or more often than you win and still have a good profit, because it all comes down to money management. Van Tharp spoke in his book ‘Trade Your Way to Financial Freedom’ of a random stock selection system that still produced a modest profit because good money management was in place.

So one of the fundamental concepts that you must realize is that a losing trade exited in a timely manner is still a success, provided it was executed in accordance with your trading plan and not on a whim.

To Set or Not to Set

The required stop loss position is therefore clear at the start of the trade, and the only question is whether you reveal it to your broker and the market by placing the order. One of the factors to consider is if your broker is a market maker in your selected market, or whether the financial instruments are being traded on an exchange. With the Forex market, there can be a difficulty with some brokers, so even though the market, at more than $4 trillion traded per day, is large enough that it’s very difficult for traders to manipulate, you can still be exposed to the broker’s dealings.

That’s not to say that the overall Forex market can’t be manipulated by traders, but it’s infrequent. It’s most likely to happen at periods of low activity, when the major trading markets are asleep, and it requires a major financial institution to have the capital to do it. It’s not illegal, but it can be detrimental to you so is something to be aware of.

However, when considering trading in equities, the amount of cash flow is much smaller. If the shares you are interested in have a relatively small volume of trading, this is subject to manipulation with a big investor intentionally moving the prices by their actions. Some traders purposely choose to ignore the smaller stocks, both for this reason and because more heavily traded shares are more likely to behave rationally and predictably.

You may be alright placing your stop loss orders on the market if you make sure that you trade in periods of higher activity, and on more popular securities. You may not have a choice, if you are unable to keep a watch on the market movements frequently enough. If you are swing trading your plan might be to only look at the closing prices each day, and ignore intraday fluctuations, and in this case you would want to avoid putting orders on the market. Stop loss hunting is a real issue that can affect your trading, and you need to be mindful of it to avoid trouble.

This entry was posted on Monday, March 14th, 2011 at 9:25 am and is filed under course. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.