The Truth About Day Trading Stocks: A Cautionary Tale About Hard Challenges and What It Takes To Succeed

CHAPTER 9

Minimizing Your Risk with Stop/Loss

 

 

 

As it goes with every investment system, the fundamental risk for a day trader is trades that run into the red. From the viewpoint of accounting, that red might as well be spilled blood. The good news is that as a day trader, you can control the amount of spillage. With a proper stop/loss system in place, you’re in charge of how much you can lose.

Just what is stop/loss, exactly? The answer to that question is a little complicated, because day traders have different definitions and strategies. In general, stop/loss is the choosing of a predetermined price at which you immediately sell your positions, if they nosedive or skyrocket to that price. The point is that you sell at a loss, a small loss you’ve determined you can handle—so it’s never a devastating loss.

MAKING STOP/LOSS AUTOMATIC

By consistently applying strict stop/loss procedures, you minimize your unplanned risk. As soon as you meander from that method, you invite unpleasant surprises. Therefore, the application of stop/loss should be en-grained in you, automatic.

That sounds like a no-brainer, doesn’t it? Well, it’s not quite as easy as it seems. You have to be on the lookout for your own capricious temptation. It’s so easy to stray from your system, especially when you’re an amateur.

Take me, for example. I remember first learning how to stop/loss. It was back in 1999, at my very first training program. They made it all sound so simple. If your trade goes against ...