Success System Revealed Review

After defining your trading float, your maximum trade loss needs to be defined. This is a core principle of excellent money management. The maximum trade loss is quite simply the maximum amount of capital that you're willing to lose on any one trade. The reason for defining this upfront (before we even open a trading position) is to make sure we can stick to one of the cardinal rules of trading and that is to keep our losses small. We want to make sure we set our maximum trade loss as a small percentage of our trading float so it won't have a detrimental effect if we have a string of losses. Most traders fail in the markets because they risk too much. As I said, the goal is to keep our losses as small as possible while also making sure that we open a large enough position to be able to capitalise on profits as well.

A tight stop is an exit point situated not too far below the entry price. An initial stop that is set too tight can be triggered too early and the trader would be kicked out of the trade before it has a chance to rebound. A much looser initial stop will not trigger exit from a trade. The loss can therefore be bigger but this is compensated by the trade having the potential to climb that previously wasn't possible. Setting tight trading stops has its drawbacks. First, by having tight stops you'll decrease the reliability of your system because you'll get stopped out more often. Second, and probably a little bit more importantly, by setting tight trade stops you'll dramatically increase your transaction costs. To give yourself a fighting chance, especially if you're starting with a smaller float, you'll want to trade a system that doesn't chew through brokerage.

One of the most common questions I receive when traders are first introduced to the concept of an initial stop is 'How wide should I set my stop?' Or, in other words, how much room should I give the price to move? Unfortunately, there really are no definitive answers because it largely depends on what time frame you're trading. If you're a shorter term trader, you're going to have an initial stop that's set closer to the price. If you're a longer term trader, you'll give the price a little bit more room to move by setting your initial stop wider. Once you've identified what time frame you're looking at trading, your initial stop must ignore the normal fluctuations within that particular time frame. That is to say, you don't want to have to close out of a position just because the price moved as part of its normal trading volatility.

About the Author

The initial stop is a predefined point at which Success System Revealed  we exit a position, should the trade not go in your favour. When we enter a position, we don't know at what point in the trend we are. We might be entering just before the trend changes. Who knows? Accordingly, we need to set an exit point. It's like drawing a line in the sand underneath the price and saying, 'If the price falls below this line, then the stock hasn't done what we thought it was going to do, therefore we'll exit the position.' Being a successful trader requires making decisions that are counter intuitive and one of our natural tendencies is to hold losing positions too long. That's why it's important to place an initial stop. I remember Richard Harding giving me a cracking bit of advice: "You're protective stop is like a red light. You can go through it, but doing so is not very wise!"

Examine the historical trading performance using the candlestick technical analysis software on your stocks of choice. This will give you confidence that there is credence in the method and that the system works. Begin with paper trading a basket of stocks and monitor your trading performance as you experience and refine your use of candlestick technical analysis. When ready, proceed to real-world trading with your new-found tool. Do not forget or abandon your other trading tools and resources as candlestick technical analysis is a complement to (not a replacement of) your trading tool box and your trading wisdom. Master the counter intuitive notion of the trading stop and you'll do what so many novice traders fail to do - turn a profit. How many times have you held a position too long? Everyone has at some point in their trading career. Over the years I have learned that it's much easier to take a small loss than a big one and the important thing to remember is that every big loss started out as a small loss. The art of placing initial stops is to catch a loss while it remains small. It only gets harder as the loss gets bigger and your ego gets more and more squashed into the ground.


You must logged in for view and post comments.