Trading Update: Hidden Bonus of Stop Loss Orders

Another good week for improving my system during live trading. Of the seven trades made this week:

Trade 1: Stopped out – loss.

Reason: On wrong side of trade – went long when I should have been looking to short.

Trade 2: Stopped out – gain.

Reason: On right side of trade, but market backtracked enough to stop out my position before continuing move.

Trade 3: Stopped out – loss.

Reason:  Entered trade too early- got whipsawed out.

Trade 4: Profit target hit – gain

Trade 5: Early exit – gain

Reason: Market making unanticipated movement – prompting trade close out to cut risk.

Trade 6: Stopped out – loss

Reason: Failure to manage trade properly, resulting in gain turning into loss.

Trade 7: Manual exit – gain

Reason: Incorrect profit target put in- as a result trade never reached target point and had to manually exit with a smaller gain.

Each trade enabled me to increase the accuracy of the following trades, but this was an interesting week with stop loss orders. On almost every trade that I got stopped out on – trades # 2,3 and 6, I got stopped on the “exact tic” – meaning that the market price moved to my exact stop loss value before reversing and going the other way. In other words, the market in those cases moved against my position just enough to trigger the automatic close out of my trade before moving in the direction I anticipated in the first place. It’s what’s known as being “whipsawed” out of your position, and when it happens on the exact stop loss value you entered, it’s hard not to take it personally- as if the market is personally “trying” to stop you out of your position. Of course this can’t be true with the multitude of other traders orders out there but it still feels that way. =)

When close stop outs/whipsaws like this happen – the temptation is to not use stop loss orders- since if none were in place, those trades would have all been winners. It’s a bad temptation though, since stop losses protect your account from taking heavy losses.  Trade #1 is a perfect example of that. I was on the wrong side of a trade and not having a stop loss would have cost me plenty.

While I did feel very annoyed how I was getting stopped out, my annoyances went away and I was forced to consider the true problems at hand. The problem wasn’t the market being against me, but either my trade entry wasn’t timed well enough or my measured stop-loss risk needed to be larger.Once I took ownership of the problem, I was able to find solutions in increasing my market entry accuracy.

The stop-loss being triggered revealed a trading problem that needed solving rather than the need to reject stop loss orders. Why it took me this long to come to this realization I’ll never know. =)  As a result of my improvements, trade #7 would have been the best trade of the week in terms of profit IF I had determined the right exit target. I was close, but missed it and the market reversed and took back much of the gains.

Overall this week was another good one with 6 of 7 trades being in the right direction and my ability to determine the best entry price improves with every trade.


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