Playing With Stops

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One of the biggest issues with creating a trading system is finding a stop and profit target that you can consistently work with that will make you a profit at the end of the year.

Obviously if you are trading a discretionary still you will probably not care about how to manage your stops so much. The benefit of mechanical trading systems are that you do the same thing every time. There is no room for error….it will either work or it won’t over a given number of trades. And make no mistake it is the stop and target that will determine whether you are good trader, not the reason for entering a trade.

What I wanted to highlight in this short post is that once you have done your home work, workout out your expet strike rate, tested your stop and target strategy backward and forward and you have taken your first trade….DO NOT PLAY WITH THE STOPS. It gets very tempting to move your stop up after a few poinst profit or even worse…you are 5-10 shy of your target and the price stops starts to pause and you want to close the position. Do not do this. This will turn your tested system on its head. The likely hood is you will close your pofits to early but let your losses run to the original stop level. This changes the risk to reward ratio of the system as a whole and could mean your system makes alot less than it should.

What you will find is as you bank those profits early you will see your target hit moments later. You will then calculate how much you should have won. Then you realise that if you have a losing trade now you see how those missed points could have made a difference and thus you try to avoid a loss next time to “make up” for it and guess what…you miss another winning trade and you are even worse off than you were when you started.

It all comes down to having no fear and believing in your trading system. If you do not believe in what you are doing do not do it it in the first place.

So remember, do not play with these things, it is the stops and the point at which you close your trades that make you a great trader.

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