1. Stop Loss
Regarding stop loss (or cut loss ), many friends call me up to ask what should be a stop loss price of a certain counter. Stop loss is a personal preference which is subjective. Some traders do so basely on charts, some based on the amount of money they are willing to lose. There is no correct or wrong template to stop loss.
A loss is ultimately a loss, it does not mean there is a correct amount of money to lose. Stop loss is a countermeasure, not a remedy. It should be viewed as a means to limit the losses when it is foreseeable that the price may fall lower, resulting in more losses.
To have stop-loss decisions or not, it is also another personal preference. To hold on and wait out is another choice too. I do not have the time to explain this over the phone so I'm penning down my thoughts here to share with all.
To sum, stop loss is a personal choice, not an absolute guide, but a reference to make further decisions.
2. Missing out profitable trades
The market generally makes a retracement. Instead of trying to predict the lowest point, a trader should make an entry if he is confident about resumption of the trend, but only with a reasonable stop loss. Suppose the market continues retracement, a wise trader will even average his position, if he is confident, to increase his profits. But if a trader is of the attitude that he will enter only perfect trades, then he is bound to miss several profitable trades.
3. Pseudo Stoploss
When traders feel that a point is the ultimatum of retracement, they tend to place a stop loss just 5-10 pips below their entry. These kinds of stops will be even hit by a noisy move, let alone the extension of a retracement move. As a result, when the real move happens the trader will watch it with awe and frustration.
4. Overtrading
The aftermath of the first two repercussions results in frustration, which in turn leads to overtrading. When a trader misses out a series of profitable trades or when the real move begins after the stop loss being hit, it instigates emotions which result in overtrading. The ramifications of emotional over-trading can be disastrous and can wipe out the account before you even realize it.
Conclusion
What is the purpose of trading?
Yes, profits and wealth creation. No trader will be rewarded with extra bucks if he has made a perfect trade. Instead of searching for a perfect trade, try to find out trades with optimal risk-reward ratio and execute it and develop the maturity to accept the eventuality. In case if you ever come across a perfect trade, just check it out with a 'totem'.
