Trading Basics: Evolution of a Trader

WAS AN INITIAL STOP USED?

If I invest (buy-and-hold, but many position trades as well), then I do not use a stop unless I want to sell the position. In that case, I will often use a trailing stop placed a penny below the prior day's low. In a strong uptrend, the stop will ride price higher, but I know that as soon as momentum weakens, I will be cashed out.

For day trades, the time required to confirm the placement of a stop loss order can be an issue. Instead of placing a hard stop, I will use a mental one. If a stock turns in an adverse direction, I will sell it immediately instead of letting a hard stop take me out. Using a mental stop allows me to focus on the trade instead of worrying if the stop order went through and then trailing it upward.

For swing trades, though, it is entirely different. I use a stop on every trade. I am in the trade for the short term with diminished profit potential, so I want to keep losses manageable.

The start of a trade is the most dangerous time. The initial stop can be far from the entry price, especially for highly volatile stocks. If the trade goes bad, it will cause a big loss, and those losses are the worst. You have just entered a trade with the hope and confidence that it is going to be a huge winner only to find hopes dashed when the pinheads push the stock down just enough to tag the stop.

When checking trades for mistakes, was the initial stop positioned properly? Did you ignore the stop? Read Chapter 3 of this volume, Do Stops Work?, ...