Technicals should be used to set up RISK/Reward parimeters. As such
they will provide the market trader with a mechanism for a risk and money
management approach to trading. Defining risk means using "PROTECTIVE
STOPS" to help protect against unanticipated adverse price movements. If
stops are not used, the market trader is not taking advantage of one of the
most powerful aspects of technical analysis.
A stop should be placed at the time of the "ORIGINAL TRADE"; this is when
one is most objective. Stay in the position only if the market performs according
to expectations. If the subsequent price action contradicts of fails to confirm these
expectations, it is time to exit. If the market moves opposite to the chosen
position, you may think "why bother with a stop - it is just a short term move
against me. " Thus you stubbornly stay with the position in the hope the market
will turn in your direction. Remember two facts:
1. All trends begin with short-term moves ; and
2. There is no room for hope in the market. The market goes its own
way without regard to your position.
The market does not care whether you own it or not. The one thing worse than
being wrong is Staying Wrong. Lose your position, NOT YOUR MONEY.
Be proud of the ability to catch mistakes early. Getting Stopped Out concedes
a mistake. People hate to admit mistakes since pride and prestige get involved.
Good market traders will not hold views too firmly. It has been said the famous
private investor Warren Buffet has two rules :
1. CAPITAL PRESERVATION ; and
2. DON'T FORGET RULE 1.
Stops are synonymous with Rule 1. You have limited resources. The resources
should be maximised, or at a minimum, be preserved. If you are in the market that
has moved against you, it is time to exit and find a better opportunity. Think of a
STOP as a cost of doing bussiness.
Each trade you make is a battle. Any you will have to do what even the greatest
of Generals have to do - make temporary retreats. A gereral's goal is to
preserve troops and munitions.
YOURS IS TO SAVE CAPITAL AND EQUAMANITY.
Sometimes you must lose a few battles to win the war.
