Don’t Stretch Your Stop Loss

Posted by Deb | Day Trading Journey | Saturday 10 August 2013 11:33 pm

I would like to speak today about a habbit I once had, and recently heard about other new traders who are getting into it: I spoke with a new trader, who realized that when his trades go bad, with the market going stronly against him, he can often avoid loosing by stretching his stop-loss. He takes a bigger risk, and when the market seems to find a new critical point he adds new orders from the new critical line, thus “averaging” his losses. In this method he can make even double profits, since if the market goes back to its original possition, he will have more money or contracts invested and make more profit!

I know I have been doing this mistake a lot, and usually it works. When I used to do it, I made very nice profits over a long period of time. So what’s so bad about this, you ask?

Stop-losses are exactly what their name means: A point in which you think the trade has gone bad, and in which you should get out of the position in order to stop your loss. When entering a position, you should calculate exactly where you would like to put your stop-loss, so as not to loose too much. You don’t want to have your stop-losses too tight, otherwise they will catch before the market has a chance to retreat to your desired direction. Place the stop-losses in a position which is sensible by the graphs. If you see the stop-loss is too big for your account, simply do not enter this position. Wait for a better chance.

Putting a tight stop-loss and then stretching it will make you risk too much money. In most cases, by averaging out – entering again in the next critical point – you will be able to exit the position with a nice profit. But then, one day, the market will surely continue to go against you: It will continue breaking the subsequent critical lines, and if you go on “averaging”, you will find out you have wiped out your account.

Stretching your stop-losses is a bad practice. Lazy traders who do not want to calculate the right place for the stop-loss will find it appealing, but the big boom is sure too come. Don’t trade without good stop-losses.

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