You want to protect your trading money, and that is why you have to put always a stop loss on each and every trade you place. I know that many traders don’t like to do that because they think a stop loss is their worst enemy. Many traders have the feeling that every time they open a position the market turns around just to hit their stop. Let me ensure you; it does not work that way. When it comes to trading, the stop loss order is probably the most important invention ever, because it protects you and your cash from much bigger losses.
But why do so many traders hate or ignore the stop loss order? There are surely many reasons. I will talk about the (in my opinion) five most important!
1. Many traders don’t even know how a stop loss works. The name alone scares them.
It is a fact, that many traders join the forex market without the basic knowledge. They only remember the “make easy money promise” and jump in. So, why care about two negative sounding words as STOPS LOSS. And here I must agree. These two words do not sound very nice and helpful. As a trader we always try to think positive, and using an order that is called “stop loss” does just not help much. The word “stop” sounds like a big barrier, and I don’t like barriers. The word “loss” is part of life, but it is the opposite of “win”, so I do not like this word too much either when I try to focus on profits. I always look for simple solutions so I just renamed the stop loss order into account protection order. This sounds much better and actually says what it really does. Please do exactly the same and after practicing a while you will see the huge difference. Your whole attitude can change because of two or three simple words.
2. Some traders do not have a strategy and therefore no clue where exactly to place their stop.
I don’t have to say much about that, because I think it is already very clear. If you do not follow clear entry and exit rules or if you don’t have the skills to identify major support and resistance areas, it is almost impossible to figure out where exactly to put your account protection order. So please make sure you understand the basics and improve your technical skill on demo accounts, before you trade live. Buy an eBook or attend to a good trading course first. Invest in yourself before investing in forex or other major financial markets.
3. Traders place the stop to close to the entry price.
This is pretty much the same problem as in point two. The reason traders place their account protection order (stop loss) to close is, because they just don’t know where exactly to place it. These traders fear a bigger loss and place it too close to the entry price. That of course is a big trap too. The price needs to move against you only for a few pips and you are out of the trade. Also remember that you have to count your spreads in when putting a protection order.
4. Traders are afraid of losses and don’t want to accept the fact that the price could turn and just hit there stop loss order.
Many years have passed, but I still remember how it felt when a whole account gets wiped out because of one stupid mistake. I liked the fact that I took some very nice and profitable trades during that period and I just did not want to lose this incredible feeling of success. So what did, I placed a trade in the direction of the actual trend, with a way to big position. Instead of risking 1 or 2 %, I exposed my account to about 7% for this one trade alone. At first it looked OK, but suddenly the trend changed. Instead of me closing the position with about breakeven I left it open. Even that would have been ok, but I did worse. I deleted the account protection order from this position because I thought that the price would follow the main trend in the end. It didn’t! The whole trend changed and I did not have the strength to close my losing position. I knew that the trend changed and I also knew that I should have reversed my position and get rid of the losing trade. Two days later I got the Margin Call. I guess some of you know what that means, right! You can do that once or twice, but eventually you need to learn from your mistakes if you want to survive over the long run. The reason I did not close the position was partly because my ego was too strong and partly because I thought I could not handle a loss. Now I am laughing about it, but 10 years ago I was crying like a baby! Always remember; the account protection order is kind of a health security policy. If you don’t apply the rules you get sick!
5. Trader are sometimes too confident
In 2002 I was making some small profits on the EUR/USD and the market was ranging all the time. I went long on support and short on resistance with a stop of about 25 pips just over resistance and under support. It worked great for about two weeks. I thought well, that’s it… I AM THE BEST. The next trade I took was without a protection stop order and guess what happened. The price went against me for good. I closed the trade in the end manually, but with a much bigger loss than planned! I actually lost all the profits I had made the days before because of that one major mistake. Now, a little dose of pride mixed with a few drops of healthy ego is really helpful in the trading business. You just need to find your way back to “real life” after every trade you place. The market does not care about you. It will do whatever it has to do, with you or without you on board. Lessons learned! Please write your comments under this article. I need to make sure that the information here is helpful to you,OK!
We will put a lot of emphasis on this and other mental issues in our live trading room. I hope to see you all there with us. Have a great month!
Happy & Healthy Trading