In the past, the time I place a stop loss in my trade, it gets hit and I make a loss in that trade.
Are you experiencing the same when you place a stop loss in your trade? If you are one of those peoples who are experiencing the same, this article will help you where were you wrong while placing a stop loss.
Let us first understand what exactly a stop loss means.
A stop-loss order is an order where you close your position/trade at a certain price point in order to limit your loss.
As the name suggests, one’s uses a stop to limit one’s losses where the trade idea is unsuccessful. The stop loss is an important parameter in risk management. To be a profitable trader, you make sure that your losses are small, and profits are big. This is only possible with the help of a stop loss. But poor stop placement and management cost you a lot of money.
In my years of trading experience, I have figured out five main stop loss mistakes that we do. If we avoid doing such mistakes, our winning rate will be high, and we will a profitable trader in the long run.
Let us discuss main stop loss mistakes in detail.
- Not determining your stop placement in advance: Before making an entry in stock, you should know where your stop loss point should be.
The same rule applies to entry and target points. As soon as, you enter a trade, profit/loss fluctuate and there is no point in defining the stop loss at that time. If you didn’t decide your stop loss and the stock starts moving against your favored direction, you will be in fear and cut your trade early. Identify proper stop loss position before taking entry in a stock helps to remove any emotions in your decision and you will be mentally prepared for the defined profit or loss in that trade.
- Placing your stop loss based at any random place: Market doesn’t care about your R: R ratio, any magic number such as two percent away from your entry point. Stop-loss should be defined based on technical analysis. If you find your stop-loss point is very far and you will not get proper R:R ratio, it is better not to trade in that stock.
- Moving your stop loss to break even: The purpose of stop loss is to protect you if your trade idea is not working out in the favored direction. The purpose of stop loss is not to make your trade risk-free as soon as it comes in your favor. Moving your stop-loss to breakeven/marginal profit is like calculating your stop placement based on arbitrary numbers. If your break-even point is also a support or resistance level, then shifting a stop-loss position makes sense.
- Never moving your stop loss: As you know that the purpose of stop loss is to protect your account from major losses. In the above point, I said you move your stop loss when a trade comes in your favor. Now, I am saying, you are not moving your stop loss. Why is this contradictory statement? In the above point, the decision was emotional. This time, we are making decisions based on technical analysis and to protect our profits. When a stock reaches near your target, to protect your profit and better RR, you must modify stop loss, because the market doesn’t know your target point, it may reach that level or not.
If you avoid these mistakes and improve your trading style, sooner or later, you will be a profitable trader.