Post courtesy of Jordana Balsam from elitetradingtips
Have you ever eaten a cookie when you are trying to lose weight and decided that since you already ”broke your diet” with that one cookie you may as well have another which often leads to another and then another and ultimately sabotage?
There is a certain mindset that some of us have of an all or nothing effect where if you’re already “being bad” you may as well start “fresh” tomorrow and enjoy the damn Oreos tonight. If you’ve ever done that you know that waking up the next morning you wished you had stopped at just one. One or two cookies would not have made an impact on your waistline and the act of stopping yourself at one would make you feel confident that you can live and enjoy but not give back your weight loss week.
The same rule applies to trading. By utilizing stop loss, one demonstrates confidence in one’s ability to take control of the situation and not let the situation control you. Some might think that the successful traders have some gift that they simply add or hold onto their positions and the positions eventually work out. The reality is that the act of taking a stop shows that the trader is willing to accept a loss and has enough confidence that they will have success in subsequent trades. Similar to eating one or two cookies with confidence that you will stop at that and feel full. (A feat I have never personally successfully accomplished!)
Many of us have heard or read stories about perceived legendary traders who have taken tremendous drawdowns only to see the position come back in their favor and make a fortune. Many of these “cowboy” traders are either no longer in the business or have been diminished to shells of their former selves. Unplanned double and tripling down in positions might workout 80 percent of the time but the losses that will be incurred during the other 20 percent of the time will more than offset those gains and often put a trader in a tremendous hole – too difficult to dig out of – or if it gets deep enough it can put a trader out of business.
There is a saying in Weight Watchers: “failure to plan is a plan to fail.” If you plan out the decadent dessert, then you can successfully put a “stop loss” after you’ve finished consuming it. If you act with abandon and eat the entire container recklessly you will most certainly put your weight loss goals in jeopardy and dig yourself a hole too deep to get out of easily.
Unfortunately, many traders need to experience these lessons to fully appreciate the discipline that it takes to succeed. In today’s market one really needs to have well thought out and planned entries, targets and stops. The stop is a point where the working hypothesis or catalyst for the trade set up is no longer valid. Ignoring the stop transforms the trader into a gambler whose only option is to pray for the trade to work out. To be an elite trader you don’t need to be right more than 50 percent of the time. It’s a matter of increasing and holding your positions that are winners and not adding to and holding your losers.
Whether you are a day trader , swing trader , or you have a longer term outlook utilizing stops will protect your capital and enable you to accomplish your goals.
*DISCLOSURE: No positions
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