Don’t Lose On Your Trade Because of Tight Stops
In trading, the three elements of a trade setup are the entry, stop and target. All three are equal in importance.
PLACEMENT RULES
A stop loss is merely transferring the risk to someone else. The stop loss should always be placed in a position which invalidates the setup.
DON’T MAKE IT TOO TIGHT
Nothing can be more frustrating than having the correct entry but making the target too tight of a stop resulting in you getting stopped out of your trade only to then see it hit your target. Having too tight of a stop is one of the main reason traders lose today.
HUNTING FOR STOPS
Having a tight stop does not necessary invalidate the trade if it hits. We live in a trading world of algorithm computers that are programmed to hunt for your stop. You have to give your trade setups a little more wiggle room to keep you in the trade.
AN EXAMPLE
Here’s an example from my trading room that I called live for our traders. Suncor Energy (SU) gapped down under support and was hunting for lower prices. We had a bias of being short and just needed an entry. The first four five minute bars were red, showing us real selling so we waited for a retracement to get short.
Tight Stop Setup (STOPPED OUT)
Entry: 33.08, Stop 33.15
Correct Stop Setup (WINNER)
Entry: 33.08, Stop 33.20
Remember if the stop doesn’t invalidate the setup, then you have it too tight.
[Editor’s note: Peterson’s live trading room was chosen as the best trading room of the year by the TraderPlanet Star Awards. Learn more about his site here. ]
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