Investing.com - Financial Markets Worldwide
Get 40% Off
Get 40% Off
👀 👁 🧿 All eyes on Biogen, up +4,56% after posting earnings. Our AI picked it in March 2024.
Which stocks will surge next?
Unlock AI-picked Stocks

A Double Edged Sword: Using Stops To Minimize Losses

ByTrader Steve
Published 10/22/2014, 07:59 AM
Updated 07/09/2023, 06:31 AM

It never ceases to amaze me how, whenever you think about overriding your entry or exit rules, things have a way of working out to prove that, by sticking with your method (whatever it is), things generally work out better.

I talked here about being stopped out on a number of short positions last week due to the markets rallying off its lows.

On Friday I was stopped out of a short trade on a European stock for a -0.57R loss, as the breakout I was trading had failed. Yes, it was frustrating at the time, but the particular stop methodology I use is for a reason - to ensure that any loss incurred is as small as possible, and to eliminate the possibility of that loss getting any bigger.

As it happens, this particular stock price gapped up on today's open, and has kept moving up throughout the day. This was despite the European markets moving in the opposite direction.  If I had ignored my own rules, which are very aggressive in terms of cutting losing trades, and had closed the position on today's open, then the loss would have been in the region of -1.2R. And if I had waited until today's close, hoping for price to move back in the direction I wanted, then the loss incurred would have grown to -2.26R.

As the old saying goes "Your first loss is your best loss". So, while Friday was annoying as a number of stocks acted in this manner, by adhering to my rules then I was able to keep those losses as small as possible. Of course, those trades could have reversed back in my favour, but that can be seen as succumbing to hope, which is not a valid strategy. Doing what I did kept as much of my equity intact as possible, as well as keeping me on an emotional even keel. A valuable and timely reminder!

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

Latest comments

Install Our App
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.