Trading is a business of probability. Every trader will take losses, so we need to use protective stops.
Many traders take profits quickly but hold on to losing trades – it’s human nature. We take profits because it feels good, and we try to hide from the pain of losses.
3 BAD TYPES OF PROTECTIVE STOPS:
- Above/below support/resistance.
This can be previous highs/lows, pivot levels, Fibonacci, etc.
S/R aren’t lines but zones.
- Percentage move against entry.
Meaningless with regard to the chart and price action.
HOWEVER, #1 rule: Must be within your money management rules: No more than ½ of 1% of your trading account.
- Volatility stops
Some traders use this technique because they say you have to allow room for the “noise of the market.
Seems logical, except for one huge problem:
It violates one of the most well-known rules of trading:
“Cut your losses short and let your winners run.”
So how do you keep that rule and still allow for the noise of the market?
You don’t! You need a way of identifying the noise of the market and trade when it is removed from price action so you get more low-risk, precise entries.
A BETTER ANSWER: Stops go where you’re wrong
When the reason for your trade no longer exits, then your trade should no longer exist.
The best risk management is an excellent entry.
For me, it’s always a Cycle High/Low.
Email me to get info on my Cycle indicator at Barry@TopDogTrading.com
Gives laser-sharp accuracy so risk is only the range of a bar to a bar and a half on every trade.
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