Use a stop loss
HAVE A STOP LOSS IN PLACE
Hi. In this article, I wanted to share some very important but slightly worrying statistics. This in effect is one of the ten pillars of what to have in place when creating a successful trading plan. It all gives some very interesting food for thought and reason as to why following a totally objective system like what we have at www.tradethesignals.com is the way for you to ensure you do not end up on the wrong side of the statistics.
As per usual, before I start, I wanted to highlight a quote.
It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong. – George Soros
Think about it, its a very significant quote. It summarises really well that you should not be focused on necessarily the winners and how much you made but what about the losers? All those times you got stopped out , all those times you got margined out of the trade, all those times you close because you didn’t have a PLAN in place. Really important stuff. So here are the clean simple statistics in this chart that back up what George Soros is talking about:
The message from the above chart is crystal clear. Its why here at tradethesignals.com, we employ very clear stop losses on all of our trades and its why we consistently have a 80% win loss ratio on all of our trades. This win loss ratio statistic is very very important and more about this in a while.
LESSONS FROM THE ABOVE CHARTThe above chart was taken from a real broker with real live private investors and traders. They have collated the results over from memory, several hundred thousand trades and over a period of time. These are small private investors like the majority that read excellent sites like this one.
THE 43 MILLION TRADE TEST !
Let me go a step further and give you some insight from another piece of research. This piece of research is from the very excellent Dailyfx.com. You can find the article here that they wrote on private investors. Absolutely fascinating research and it all points to why traders need to have a stop loss in place.
FXCM doesn’t gain anything per se by publishing these types of statistics. In fact i would go on to say that its in their interest to retain successful clients rather than keep having clients that “blow their account” as it were
So there are many many lessons to learn from this and we need to ask ourselves the question as to WHY? Why do private investors let losing trades run and cut gains potentially early? Of course it does come down again to ensuring you have a clear definitive plan in place. However, there is something also around our mindset and behavioural aspects. This is what our next chart is about and its called prospect theory. From a satisfaction and fulfilment basis, the enjoyment from winning is less than the pain that is caused by losing.
Think about it for a while. When you win, what level of satisfaction have you gained relative to the pain you feel when you lose? So putting this into practice and how it relates to our topic of implementing very clear stop loss levels
If you are losing on a trade by 100pips then the pain you feel will be greater than when you were winning by 100pips. Therefore, UNLESS YOU HAVE CLEAR STOP LOSS LEVELS SET, you are likely to face a period of emotional and psychological trader turmoil that may very well result in you closing out a trade potentially early. If you have a stop loss set , then the gyrations in market movements should not worry you as your risk is already controlled
Having no stop loss levels set causes greater issues to ones self being but thats a bit too deep and not for this particular article. I will however cover this at some stage as its about general well being
PRACTICAL ACTION STEPS
So we have set out the statistics above. Now lets get to the very practical and actionable steps you as a trader can take to ensure you do not fall victim to these issues:
For now , this is about it on the Importance of Stop Loss levels. Please do take note and read this and take on board the key lessons. I will cover off other aspects of a Trading Plan in future articles
Finally , why not join us at www.tradethesignals.com. Our strategy for trading is really simple. End of day, S&P500 Trading signals with no intra day trading. NOTE: We have a free trial available for new subscribers so you can try out our service first. We have 10 different algorithms programmed and waiting patiently to execute trades. Our performance record? We have achieved over 2,000 (Yes Two Thousand !) points in the S&P during 2016. Thats some record. Join our success today where our overall aim is simple. Clear end of day signals allowing us the rest of the day to focus on developing ourselves. We won’t be writing too many articles about market behaviour and dynamics. Instead, much will be focused on developing you and our community as individuals. Development that will stay with you irrespective of your trading strategy, timeframe, technical or fundamental. Even help you outside trading! Thats all for now but more on Trading Plans in our next article.