RAHSIA KEHEBATAN STOP LOSS

Stop-LossesStop-losses are one of the best ways of protecting yourself when things go wrong. Good traders get out when their loss limit is reached without emotion or second thought. This is one of the main reasons why they are good – they take their losses, swallow their pride and live to trade another day.A stop loss is a point where you no longer wish to be an owner of the stock and ideally is a point where the character of the stock has changed so much that the original reason why you entered the stock in the first place is no longer valid. There are different methods of setting stop-losses. The major method is to base it on the share price though other methods may involve getting out once a time limit is reached or when a certain proportion of your account is lost. Even when considering the share price method, there are several ways of calculating stop losses. The way you chose must be compatible with your system and you will need to back test your system considerably before you decide on a particular method. Some examples include:
Using a percentage retracement – i.e. having the stop loss a certain percentage away from the low of the day
Basing stop losses on major resistance or support levels found by analysis stock charts
Using various indicators such as ATR (average true range) to take into account the daily variations in the fluctuation of a share price Your stop-loss method is essentially an extension of your personality. You need to be comfortable with your method or otherwise you will not stick to it! One of the best methods is to use a stop loss method that is free from emotion and is mathematically calculated. This way, there can be no room for emotion to creep in. Generally these types of stops can be calculated by a computer to make things even quicker!
Before you enter into a position, you must know where you will be placing your stop loss and your method needs to take this into consideration. Never enter a trade and then consider putting in the stop loss as an afterthought; you must always know where to place the stop loss before you even enter the trade. This is another key for a successful trader. When you have set your stop loss you can then consider trailing it. This means that if, for example, you bought the stock at $10 and it is now $11 and you set your initial stop loss at $9.50, you can now consider increasing the stop loss to say $10.50. This means that you have effectively locked in some profit by “trailing” your stop loss even if the trade starts going against you. You can never lose on this trade! The final rule is that you must never trail your stop on the opposite direction. This means that it is perfectly acceptable to increase a stop loss if the stock is going up, but you must never decrease your stop loss even if the stock starts to go down. Doing so will expose you to even more risk and is a sign of an undisciplined trader. Example Of A Simple Stop Loss MethodAs mentioned above, ATR can be used to calculate stop losses. Many computer programs such as Metastock will calculate ATR for you and save you a lot of time. Every day, almost all volatile stocks display an intra-day shift in prices. In other words, there will be changes during the day when the price will shift upwards or downwards from the original opening price of the day. There will be an opening and a close price as well as a high and low for the day. Most of the time, these values will be different from each other. To add more complication, different days have different intra-day ranges. Additionally, different stocks have very different ranges. The result of the daily change in prices is that if you set your stop loss within the intra-day range, you will almost certainly get kicked out of the trade too early. If we take an average of the intra-day range of say the past 10 days, we arrive at a figure that gives us estimation as to how much, on average, we can expect the stock to vary during the day. The idea is that if we place the stop loss a certain proportion away from the low of the day, say, one and a half or even two times away, then we can be reasonably certain that the intra-day variation will not prematurely kick us out of the trade unless there has been a serious change in the characteristic of the stock. ATR is, in principle, very similar to the above explanation (though technically speaking, there is a slight variation in the calculation that we will not go into here). We therefore want to place the stop-loss a fixed multiple of ATR away from the low if we are to stand a good chance of not getting stopped out too early. If for example the intra-day low of stock XYZ is $10 and the ATR is found to be 20c, you would want to make sure that the stop loss is at least 20c lower than the low of the day or, in this instance, at least $9.80 (or preferably lower).

HOW TO MANAGE YOUR RISK IN TRADING

The most important rule in trading is to keep your losses small. This is the only way to ensure that if the market moves against you, you will live to trade another day – in other words, you will not suffer a loss that will take you out of the trading game. Remember, 95% of trades will lose – do your best not to be one of them.One of the best ways to do this is to ensure that you have a fixed amount as a proportion of your account that you are willing to risk on any trade. This ensures that if you have a losing trade, you will only lose the predetermined amount. This has been discussed in previous articles and will be discussed again in future ones as well. In general, the maximum loss should be set to no more than 1-3% of your total trading float. This seems very small but it can lead to huge gains in the long run. Another rule is to try and estimate your target value. In other words, what is the value of the stock that you are expecting it to go to? You should only enter the trade if you expect the trade to provide more if you obtain your target value than lose if you hit your maximum loss value. Your mechanical trading system should be built with this principle in mind. The Reward / Risk RatioThis is a good time to introduce the principle of the reward / risk ratio. In principle, this ratio will provide you with a very important piece of information to decide whether to enter into a trade or not. If we believe that a trade will provide three times more profit than the amount that is risked, then the reward / risk ratio is 3:1. In a similar way, if we believe that there is three times more risk to a trade than there is of the trade winning, then the reward / risk is 1:3. The example below illustrates this in more detail.
Example
We wish to purchase stock XYZ at $10 a share and we expect that the stock will increase to $11 over the space of about a month. We also place a stop level (i.e. a level that we will exit the stock) at $9.80 based on our mechanical trading system. This means that the amount we will risk per share is $0.20 but we stand to gain approximately $1.00 per share. The reward / risk ratio is therefore 1:0.2 and this equates to 5:1. This means that there is 5 times more reward for the risk that you will incur. This trade seems like a good one to take! Now we will not risk more than 2% of our account and that we have an account of $10,000. This means that we will not risk more than $400. As the reward/risk reward is 5:1, this means that we could stand to gain about $2,000 on this trade alone if we purchase $10,000 worth of shares!
As you will read further, it is not a good idea to put all of your money into one trade. The example above suggests that you will put all of your money into XYZ. In reality, it is a good idea to put only a fixed percentage of your money into one stock to ensure that you are not over exposed to the whims of one market alone. This will be discussed in future articles.As another rule, the reward / risk must always be on your side – in other words, you must always have more of a chance to make more money than lose it. Some traders will insist on a reward / risk ratio of at least 3:1 before even considering the trade. They will not enter any other trade unless this ratio is met. You need to develop your own risk profile and stick to it.

DEALING WITH LOSS IN TRADING

Be warned.
"Part of overall winning is taking losses along the way."
"If you have 55% winning trades, you'll win in the long run."
We've heard it said a million times in a hundred different ways.
In any trading system, we will experience losing trades as well as winning trades. We know this.
So why is it that as we moved forward from trade to trade, we become frozen with doubt when the losing trades appear in bunches?
If you think about it, when winning trades appear in bunches, we get motivated and we look for reasons to find the next trade. We're on a roll and we love it. We're on top of the world.
The words "genius" and "professional trader" seem to fit us perfectly.
Conversely, when losing trades appear in bunches, we become fearful of the next trade and look for reasons to shy away from following our system.
We become filled with doubt and the words "gambler" and "loser" seem to describe us best.
OK, so why?
It's because you are viewing your trading outcomes as reflections of you as a person.
This leads to the destruction of virtually all failing traders.
Negative personal evaluation leads to your being emotionally out of control, which leads to straying from your tested trading system .… and the result…. you're trading by the seat of your pants (which should be pulled down and you spanked!).
You see, you must develop the mindset (and the true understanding) that you are a winning trader whether you are experiencing a run of losing trades or winning trades.
Your self-image of a winning trader allows you to glide through losing streaks so you can be there for the winning streaks.
Most new and "intermediate" traders do NOTHING about their mental trading fitness. They are willing to spend thousands of dollars on "holy grail" systems and out-of-town seminars, but are totally neglecting mental conditioning.
You should be training as hard on your mental fitness as you do on preparing your trading signals.
As a broker/trader/CTA for 21 years, I have probably seen 50+ trading systems that were money makers, IF you had the mental/emotional strength to follow them!
You need to find a system that suits your personality (more on this next week), back-test the system, appropriate the money to trade the system, and then GO FOR IT.
The "go for it" part won't actualize without the mental strength to take the good with the bad.