Trading Tip of the Week #2 April 26, 2017 14:48
Trading Tip of the Week #2
Short and sweet tip for this week traders, and it's all about using a stop loss 100% of the time in your trading. This I can promise you: If you do not use a stop loss with your trades, you will not trade for long. Like we've talked about countless times, trading is largely mental. Emotions play a huge role in each and every decision you make. As emotion driven creatures, it's important we take the necessary steps needed to limit our emotions as best as we possibly can when making trading decisions. We need to be robotic. Trading without a stop loss is like sky diving without a parachute. Eventually you will hit the ground, hard.
So, what kind of stop loss do we use? A limit order, a stop on quote order, a market order, etc? A lot is going to depend on the price of the stock/ETF you're trading and the overall liquidity. For example, if you are trading sub penny stocks or a stock with a terrible spread between the bid and ask (poor liquidity), you're going to want to avoid using a market order. Market makers could very well stop you out when you don't want to be or at an even worse price. With sub pennies or stocks with bad liquidity, use a limit order. If however you are trading higher priced stocks or stocks with good volume/liquidity (should have a tight spread between bid and ask), you're ok using a market order.
Some may ask where exactly they should set their stop loss. Should it be an exact % away, or should it focus more around where support is? Typically, for any reversal play, I always recommend taking into account your profit target when setting a stop loss. We teach our students to utilize a 1/2 R/R ratio that takes into account the distance between entry price and profit target to set your stop loss. It is also smart to take into account nearby support levels and do you best to set your stop below a key level of support if able (will not always be the case).
Going over every type of stop loss to utilize or understanding how, when, and where to place your stop loss would take some time and would be tough to 100% cover in blog form. But I wanted to at-least get those of you who aren't trading with a stop loss thinking about why you should! The good thing is, we do cover all of this with our Elite Plan. If you are already a student, jump on over to the Advanced Video Library to learn more. If you are not a student, consider giving our Elite Plan a try! We offer it on a monthly, quarterly, or annual basis and you can always cancel at any time. If you have specific questions about this tip of the week or our Elite Plan, feel free to shoot an email my way at firstname.lastname@example.org
So, in summary, don't ever go skydiving without a parachute, and don't ever trade without a stop loss! One will save your life, and the other will save your trading account! Have a great week everyone!