Take Your Stops or Stop Trading

08/05/2009 10:21 am EST

Focus: STRATEGIES

Having trouble adhering to your stops lately? Well, for some traders this is a difficult psychological demon to overcome. One that if not corrected quickly will lead to your demise as a trader. Sounds pretty serious, doesn’t it? It is! For those of you who have this nagging problem, you already know the costs. So, let’s try to do something about it before the damage is irreversible.

As traders, one of the major weaknesses we have is being human. We are not robots, therefore, we bring emotions with us wherever we go and with whatever we do. Being emotional creatures is not conducive to success in trading. Though our mind is a beautiful thing, we must always stay grounded and objective with our thoughts, which is no small task!

Most traders who don’t stick to their stops know they are doing the wrong thing, but, they also won’t allow themselves to exit the position because they are unable to accept a loss. By accepting a loss, they are admitting they are wrong, and in turn, they will lose money. So, instead of facing or accepting this pain, they choose to forego their stop loss, and let the stock move against them, in hopes that it will turn around and eventually make them a winner. They will literally do anything to avoid the prospect of becoming a “loser.” Sound familiar to anyone?  Well, if I’m talking about you, then you need to continue reading.

Most things we listen to or learn in our training seminars make perfect, logical sense. Find a pattern, stalk a quality entry, locate a reasonable area for the stop, pull the trigger, sit back and manage in between. Let the stock do the work for you. It’s simple, right? Heck, if someone asked you for technical advice about a particular stock, you could probably rattle off some very nice objective, logical advice worthy of a pro, as long as you are not in the stock yourself. Everything changes when it’s our own money on the line! This causes many people to lose objectivity and become irrational.

For some traders, this nasty habit can be easily broken by going back through personal statistics and looking at the positive difference in your P/L by taking your stops versus not taking them. Unfortunately for many, merely looking back at past statistics is not enough. You’ve been ignoring your stops for so long, it’s going to take some stronger medicine to cure this disease!

The first thing you must decide on is this: Do you like trading? If the answer is yes, then the choice becomes very simple. Take your stops, or quit trading…period! Take some time and really internalize those thoughts. Imagine your life as a trader and all the positive things that go with it. The freedom to trade whenever and wherever you want, the potential to earn as much or as little as you desire, the ability to spend more time with loved ones, etc. Now, picture your life without trading. Can you handle the alternative? If you don’t like the alternative picture, then you are taking the first step towards correcting this habit.

If you’ve decided that trading is your passion, then you will do whatever it takes to succeed. That includes taking your stops. So, before you enter any trade, you must first accept that the money is potentially gone. If you are going to risk $100 on a trade, then before you enter the position, you must emotionally tell yourself, the $100 is gone—I no longer have it. After all, you can’t lose something you don’t have! If the thought of losing $100 is too frightening, then you need to lower the amount of money you are willing to lose per trade until it becomes emotionally acceptable. If you cannot find a dollar amount small enough, then try using a simulator account and work your way up to trading with small shares. If that doesn’t work, then there is a chance that this business is not for you.

Always keep in mind that we are not going for homeruns, we are looking for base hits. We focus on a consistent approach to making money, something we can repeat day after day. We are not investors; we are technical traders. We have very specific parameters for our set-ups, and using stop losses is a large part of that process. When something does not work as we plan, we take the loss and reassess. We don’t opine about the “what if’s,” we simply move on and stay objective. Remember, it’s just one trade! So, don’t let that one trade wipe out your account and destroy your trading aspirations. Is one trade worth that much?

If you feel yourself losing control, then step back and slow things down or perhaps stop trading for a bit. Don’t worry about missed opportunities, because the market is not going anywhere. When you are ready to trade again, the market will still be there. If you need to, put a sign up in front of you that simply states, “I will adhere to my stop, no matter what!” Another approach might be to record yourself when you are feeling anxious about not taking a stop. Then go back and replay it afterwards to see what your emotional process was. A “consequence” system may work as well. For example, if you don’t take your stop, then you are not allowed to play golf for two weeks. Take away something meaningful, something that will help promote change. As our own chat room moderator, Jeff Yates, always says: “You won’t change until the pain to change becomes greater than the pain to stay the same!” I truly believe that. So you need to ask yourself how much money do I need to lose before I change? 

Although not adhering to stops is a very serious problem, one of the nice things about having this type of issue is that it can be corrected in just one day. Similar to smoking, if you so choose, you can literally quit smoking today and never have another cigarette again in your life. I’m not saying this is easy, but it is possible. The same goes for adhering to stop losses. For example, learning chart patterns will take time. It’s not something that you can force yourself to learn in one day. Whereas with adhering to stop losses, if you have the mental strength and desire, you can literally change overnight! It doesn’t have to take months.

Good luck out there, and remember, this is a marathon not a sprint, and it all starts with a good, objective trading plan! The choice is simple: Take your stops or stop trading!

By Jared Wesley of Pristine.com

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