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We understand the mental stress of trading. Here, you can share your trading thoughts with fellow traders or read about futures contracts that you are not trading yet. Useful information on what large bank traders are buying or selling weekly available here.

What Every Trader Ought to Know About Stop Loss

Accepting the stop loss is probably the first hurdle a trader has to cross to become profitable. It is indeed strange that a person got to be willing to lose money in order to become a profitable trader.

First Trading Class

In one of the early trading classes that I attended, the trading instructor listed the 3Ms of trading. That is Method, Money Management and Mental Aspect. He said that the Method is the least important and the Mental Aspect of trading is the most important.

Method Vs Mental Aspect

After 4 years of trading, evolving from a break-even trader to a profitable trader, I think Method is as important as the Mental Aspect of trading. Whatever trading system that you are using or going to use, it has to be proven beyond a sense of doubt that it does has a positive expectancy and you are going to make money with it. If it does not work on past data, it is simply not going to perform in the current or future markets.

Trading System in Action

Equipped with a proven trading system, it is now time to put it into test. After a series of trades, the system suffered a string of loses with some wins in between. Then, another string of loses. You see your account getting whipped by the market and it becomes smaller and smaller.

Now, this is where the Mental Aspect comes into play. You might think you are getting familiar with the trading system and starts to be selective with the trades. You did well. The next trade is a loser. Lucky you did not put on the trade. So is the next trade and so on. Eventually, a trade that you did not put on becomes a winner. You silently hope it would not worked out. Then it became a bigger winner. You calculated that if you have put it on, it would have covered all the previous loses and made a small profit.

Stop Loss Acceptance

Another scenario is that you put on a trade. Then the market starts to move against you. However, it did not hit the stop loss price level. You watched it. Every move against you makes your heart goes faster. Every move in your favor causes you to cheer. Then you got impatient and decided you will get out with a small loss.

Either way, you have lost.

If you have taken a stop loss, that is the limited amount of money you will be losing. If the trade worked out, it would have unlimited potential to make you lots of money.

As for the small loss, remember the popular saying “You miss 100% of the shots that you did not take”? If there is no trade, you cannot make any money.

Do Not Throw the Stop Loss Away

A trading system is a money-making tool, and learning how to use the tool well takes time. A stop loss is a risk capital protection mechanism and it will protect your capital when you are wrong.