Managing your trade with stops is not just important, it is vital for the success of your trading business. Let the winners run and manage any losses so that you can stay in business.
Most traders, when they begin the business of trading, do not use stops. Why?Look at what “Stop” means to you.It means quitting what you are doing, pausing at an intersection before proceeding ahead. None of us want to quit trading when we are just beginning the business of trading, so “stops” seem to be a mental barrier against our success.
What kind of “stops” are available for trading?
Just to name a few:
- Limit – buying or selling at a pre-determined price
- Contingency- buying or selling contingent on the price of a stock or an option or a commodity being greater than or lesser than a predetermined price
- Trailing – shadowing an instrument with an exit order by predetermined amount
- Conditional – OCO (Order Cancels Order), OSO (Order Submits Order), OTO (Order Triggers Order)
Are “stops’ only used to exit trades that move against us?
No! No! No!Stops are used to take profits! Stops are used to enter a trade!It seems we need to take a closer look at what “Stops” mean to us.
- Limit means that you want to buy or sell a stock or the option or a commodity at a specified price. An example is; Buy to Open at $4.25 means that you will only buy that product at $4.25 per unit.Sell to Close at $4.25 means that you will only sell at $4.25 per unit.
- Contingency stop orders set up parameters that must be met before your order is triggered and sent to the exchange to be executed. An example is: XYZ must be equal to or greater than a certain price in order totriggerthe order to buy or sell your position at a market or limit order.
- Trailing orders are set to follow a trade in the chosen direction until that instrument reverses direction by a predetermined amount.A 50-cent trailing stop will follow the instrument by 50 cents as it moves in the direction you have set.Once the instrument reverses direction the last trailing stop price point freezes until the stock starts moving in the original intended direction.Trailing stops are like a shadow on a sunny day.It follows you until you reverse direction enough for the shadow to disappear.
Stops can be layered to achieve any outcome you have in your trading plan.
STOP hesitating using trading stops.