Stop Loss Vital to Capital Preservation and Profit
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(eToro Blog) While timing your entry on a trade is important, it’s not nearly as critical as timing your exit and most successful traders will tell you that that is what is key to their consistent profits. It’s called an exit plan, and successful traders have one even ready even before they open a position, with a “what if” strategy encompassing the best and worst case scenarios. Among the favorite tools in the creation of a sound exit strategy is the Stop Loss, which protects your trade from going too far south (or north, as the case may be) in the event the position doesn’t behave as you had expected it to behave.
While most traders use a Stop Loss to avoid even more decimation of an account balance than they’re comfortable with, they’re also appropriate for holding onto profitable positions that you’ve decided to let run for a while. Given a longer time frame, the Stop Loss can ensure that your gains aren’t sacrificed by a major pullback or a reversal; just remember to raise your stops as your gains improve. Analysts suggest that you put your Stop Loss at a comfortable (for you) margin below the high, because a move back through that level could signal a retracement or reversal.
What the best traders will almost unanimously agree with is that you should never lower a Stop Loss position in the hope that the trade will turn around. Their advice is to cut your losses, use the capital for some other promising trade or hold the capital until that particular instrument once again looks promising and you can buy it at a bargain price. There’s no shame in being wrong; what is a shame is stubbornly holding out till the bitter end.
Copyright 2012 eToro Blog
this post has been viewed 44 times
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