Chapter 29
Protective and Trailing Stops
Since most trades are only 60 percent certain at best, you always have to have a plan for that other 40 percent of the time when the trade does not do what you expect. You should not ignore that 40 percent any more than you should dismiss someone 30 yards away who is shooting at you but who has only a 40 percent chance of hitting you. Forty percent is very real and dangerous, so always respect the traders who believe the opposite of you. The most important part of your plan is to have a protective stop in the market in case the market goes against you. It is better to have the stop working, because many traders who use mental stops find too many reasons to ignore them when they are needed most, and they invariably allow their small loss to grow and grow. There are several approaches to placing stops, and any of them is fine. The most important consideration is that you have the stop order working in the market instead of just in your head.
The two main types of protective stops are money management stops, where you risk a certain number of ticks or dollars, and price action stops, where you get out if the market moves beyond a certain price bar or price level. Many traders use both or either, depending on the situation. For example, a trader who uses a two-point stop in the Emini for most of his trades might use a three-point stop if the bars are large. A price action trader who just went long might initially place a protective sell stop ...
