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Stops - Daytrading Reality Check

The first thing I think everyone should realize about stops, they are the most important reality check in the market. You must place a stop whenever you enter any trade and then keep them in moving in the direction of the trade. This is the reality of a stop placement, it is the only protection you have and you would be fooling yourself to think otherwise.

When you are long the market we can raise the stop, but we cannot lower it (prudently) except by a very thin margin, and only then knowing you're running way too close to getting your stop hit. As a good rule of thumb never lower it. The opposite is true if you are short the market. Do not raise your stops once placed. The reality is only losers state I will lower it and give it way to much room.

You must face the fact that if a trade is going against you, at least leave it alone and do not move it away from the market. As soon as you start wishful thinking, that's a sign it is time to exit, because it usually will only get worse.

Mental Stops - Bad Idea, Especially for Novice Traders

A beginner watches the market like the way a rabbit watches a great big snake, frozen in fear, unable to move. You are better off placing an actual stop in advance of any trouble within the market. Putting a stop in when things are quiet is much easier than later and under extreme pressure. A beginner cannot afford a mental stop, trust me I've been there.

Are you an investor or a trader? As a daytrader our job is much harder. We are forced to recalculate our stops daily and move them very often. We must never think that our "superior technical analysis" will keep us out of trouble better than stops can. It is this belief that is the leading cause of mortality among traders. Those whom do not use stops will eventually go broke.

You can trade for days, weeks or even months without stops. This is trading with no safety net. You may get by with it 200 times, but the very first serious fall can and will probably cripple you. An added note: not using stops will instill very bad habits. The longer you try to trade without stops, the harder you will fall one day and face the mother of all losses.

If you're not using stops, then I suggest you either quit or put your money in a mutual fund and walk away.

Get Used to the Idea of Getting Stopped Out

Do not confuse fantasy and reality. Amateurs daydream of profits and avoid the unpleasant thoughts of losing their cash and turn into investors instead of traders as soon as a trade goes again them (with no stop in place). It's a lot better to decide in advance how we will deal with reality. Put the stop in.

Trading is about getting stopped out, and using trailing stops with winners. No one is right all the time, (no one) get used to this, that's why we use stops. End of Story.

Best regards and good trading,

Eddie Thornton,
Nasdaq Real-time Signals Trader

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