Gunning For The Stops

Gunning For The StopsGunning For The Stops

By Dave McLachlan

Before we get started I should mention that this article is a little more advanced.  Therefore I would recommend that you complete the Free Trading and Investment Course found on this site before reading on – it will give you a great grounding and understanding of the important parts to a successful trading plan.  When you are ready, read on!

Anyone who has been trading for more than a few years will have experienced this scenario – in fact it happens to me still (yes, I’m only human).   Walk with me for a moment.

You’ve bought a stock, set your stop loss and are sitting ready for the price to soar.  But the stock turns around as soon as you’ve bought it.  It heads straight for your stop loss – it’s almost as if it knows where your stop loss is!  It reaches your stop loss and you sell your stock according to your trading rules - but then you watch in amazement as the stock now turns around again and makes incredible gains, only this time you’re not along for the ride.

If this has happened to you, don’t feel bad – it is a natural part of trading.  And if you are wondering, yes the market (or more correctly the institutional traders) do know where your stop loss is.  And yes they do aim for your stops on purpose.  The market goes through a natural cycle of trending then consolidation, trending then consolidation.  It is in these consolidation periods, where volume is low, that larger players can push the price around without committing too much capital.  And if they reach a point where a lot of stops are, it will trigger more selling and reduce price further.  This serves them for two reasons -

1:  They get to pick up stock at a much cheaper price before it moves up

2: They get rid of many “weak hands” or smaller players.  And when the majority of stock is in the hands of the large players, price is free to rise.

I know to some this may sound strange, but remember this – there are professionals out there who live and die by their returns.  Professionals with training, degrees, a view of both sides of the market and your stop loss and buy orders and also news long before it gets to regular investors.  And to them, your account is just another bonus cheque.

How Can I Stop Myself Getting Stopped Out?

Before I answer this question, we have to acknowledge that we have our stop losses for a reason.  No one is right 100% of the time, and anyone who says they are is either a liar or is not actually a trader.  Getting stopped out is a good thing, or sometimes it simply cannot be helped.  It limits our losses, and using it will help increase our expectancy.  What we are trying to do is not get stopped out before price takes off in our intended direction.  We can do this in two ways:

1:  Follow the overall trend, until your signal tells you the trend has changed.  For example – this may mean placing your stop beyond an up or down trend line, beyond natural support or resistance or projected support or resistance, or beyond a Dow entry or exit.  Wherever the trend reverses, we know we are wrong and it is logical to place our stop loss there.

2:  Do not get scared by the news, or if price or the market index reverses immediately after you enter.  Keep your original stop loss point, and do not move it up or sell prematurely until your trade management rules tell you to (this would usually be if price moved in your favour around 1-2 times your original risk).

Someone once told me that “Your Stop Belongs Where You’re Wrong”.  I think that is a nice way to sum it up. 

Gunning For The Stops – Real Life Examples

Here are two recent examples from my own account for you to learn from.  As always, I am happy to share my experiences if it saves you from losing your hard earned dollars. 

  Real life example Gunning for the stops

 

So there you have it – two ways to avoid getting stopped out too early and stay in a winning trade.  Remember – a truly great trader will learn from their mistakes and never ever ever give up.  I hope this article has helped you on your own path toward great things.

.

. If you enjoyed this, subscribe and get the latest updates for free:

Enter Your Email Address:

.

(Check Your Junk Mail, Just In Case)

Popular Posts

August 25, 2009  Tags:   Posted in: Free Trading Course Lesson Backlog

Leave a Reply