Chapter 1 Mistakes Traders Make When Setting Stops
Like anything else in trading, setting stop losses is a science and an art. Markets are dynamic and volatile, and a rule or condition that works today may not work tomorrow. If you continually practice the correct way to set stops, record and review your thought processes and trade outcomes in your journal, then you'll be one step closer to becoming a professional risk manager!
Here are the 4 mistakes that traders easily make when setting stops.
Placing Stops too Tight or too Close
In placing ultra-tight stops on trades, there won’t be enough “breathing room” for the price to fluctuate before ultimately heading your way.
Always remember to account for the pair’s volatility and the fact that it could dilly-dally around your entry point for a bit before continuing in a particular direction.
For example, if you have a profit target of 100 pips on the EUR/USD currency pair in a volatile market, you are better served using a wider stop-loss to accommodate the price volatility.
How close is too close depends on several things. First and foremost, it depends on your own pain threshold. This could be limited by the amount you can afford to lose, your attitude toward taking a loss or both. The nature of the investment is also a factor.
Placing Stops too Far or too Wide
The opposite of very tight stop-loss orders is very wide stop-loss orders, which either increase your chances of making huge losses by being overly exposed to the markets or cause you to trade very small positions.
What’s the point of holding on to a trade that keeps losing and losing when you can use that money to enter a more profitable
Report
