Thursday, 14 June 2007

How to place Stops and Limits

One of the most important factors in accumulating winnings as a Stock Market Trader is knowing when to terminate a trade. This is more so when a trader is trading through highly leveraged trading methods such as CFDs or FOREX. Recently, Doug Newberry has given his views on this subject matter which I would like to share it with you:

Getting into a trade is often the most glamorous part of stock trading. Knowing which trades are likely to turn a profit and diving into those trades can make a day trader feel really knowledgeable and involved in the market.

Being a good trader doesn't only mean knowing when to get into a trade, it also means knowing when to get out. The following guidelines are meant to get you started, but remember that trading is a continuing journey of discovery about the tradable nuances of market moves.

Make sure you're familiar with historical support and resistance levels. Also, check out momentum readings as well as Bollinger Bands to inform you about where to put stop and limit orders.

It's also a good idea to use trailing stops. They will allow you to ratchet up a sell stop slowly as your positions change to be in your favor.

When getting involved in stock trading, sometimes avoiding mistakes is more important than doing the right thing. Don't place your stops according to how much money you need to make. The market doesn't distribute profits based on the needs of its investors. Just because you need to make 500 dollars this week and you can't afford to lose more than 250, the market doesn't really care.

Sometimes the amount of money you need to make will correlate with how you set your limits and stops. However, these figures rarely work out to be the same. Thus, you should never use your needs as a guide to where to place your stops and your limits.

Another important thing to remember is not to invest when you are "on tilt". Being on tilt means that you have just lost some money on a trade and you want to make it back quickly. Suppose you have just lost $300 on your last trade. You shouldn't set your exit limits to make all that money back on your next trade. After all, the smart limits on this next trade are not dictated by how well (or how poorly) you did on your last trade.

Stock trading "on tilt" is a sure way to lose money. Use the stock trading tips mentioned earlier to guide your trades rather than using impulses based on flimsy reasoning and financial need.

Always let the market determine where you should put your stops and how you should set your limits. Letting go of your expectations will help you be an objective trader and will increase your profits.
About the Author:

Doug Newberry founded Investing Systems Network. As one of its directors, he helps provide Stock Trading tools and services to more than 20,000 customers in more than 70 countries to help them become more disciplined, better investors.

1 comment:

Anonymous said...

Rod and everyone:

Let me give you the background and then the question. This is an interesting question:

Background: I am a 4x trader who uses MT4 and have a successful system that I bought from Dean Malone. I monitor 14 pairs and try to take trades that are not correlated: ie if I am in the EURUSD, I would not trade the GBPUSD even if there is a signal. However, if the AUDCAD or some other non correllated pair shows a signal, I would take that.

I am trying to expand my horizons. I want to expand to futures. This would give me many more uncorrelated vehicles to trade. I am a big believer in diversification.

Now: Question: MT4 platforms do not offer Futures. However, they do offer CFD's (Contract for Difference). My question is: do you think I can use the CFD charts as a close approximation for futures charting? This way, I will be able to use my MT4 indicators to monitor the CFD market. I am hoping the CFD market is a close proxy to the future's market. So, if a signal is given for the #ES, for example, I can go to a Future's broker and buy or sell the ES mini.

Let me add: I am mostly a swing trader, monitoring the 1H and 4H charts. These are larger time frames, so I think that would go towards helping to even out the minor (and transient) differences that may exist between the CFD and the Futures' charts.

Do you think this is doable? Do you think one could use CFD charts to trade the futures? As I said, I am having to do this because I have MT4 indicators that only work with MT4. And I live in the USA and cannot legally trade CFD's directly. I am just trying to find a way so that I can chart Futures with MT4 indicators. I really like my MT4 indicators and they are not on esignal since the proprietary owner did not write them for any other platform.

Does anyone think this is doable? Does anyone have any other suggestions?

thank you in advance.

Signed: Noble trader


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