3 NOT USING PROTECTIVE STOP LOSS ORDER

Welcome back our series on the common trading mistakes traders make during trading continues...have a swell time reading

This mistake fits right in with the lack of a trade plan and money management. It is the failure to use protective stop orders once you enter a trade – not mental stops, but real stops that cannot be removed. All too often, Forex traders use mental stops because they have been stopped out in the past and subsequently watched as the market moved in their direction. This does not invalidate the use of protective stops – it means that the stop was most likely in the wrong place, as it was likely not a good technical stop.

When a protective stop that was determined before a trade was entered is hit, it means the technical analysis was probably incorrect... your trade plan was wrong.With a mental stop, as soon as the market has gone throughBthe protective stop price, you no longer act like a rational
human being. Now, you are likely to make decisions based on fear, greed and hope. How many times have you had a mental stop and tried to make a decision whether or not to take a loss?

Typically, by the time the decision is made and acted upon, the market has run further against you. Invariably,you decide to hold onto the trade hoping that you can get out on a Fibonacci retracement to your previous stop price. Unfortunately in many cases, it never touches that
price again and you end up taking a large loss. Or, you make the mistake of holding the trade an extra day because you hope the market moves higher the next day. But the next day, the market is lower yet and by then the loss is so large you cannot “afford” to get out of the position – and what should have been a small loss turns into a disastrous loss.

There is an old saying that ‘the first loss is the smallest.’ It is also the easiest to take, even though it may seem hard at the time.The only way to overcome this mistake is to have an unbreakable rule with the discipline to follow it that a protective stop loss order or hedge must be placed on every trade.I have found the easiest way to take a loss is to place the protective stop order or hedge limit order the moment or immediately after entering the trade.Do your homework when the markets are slow. Place your orders while the market is still quiet. Another rule to follow – under no circumstances should an initial protective stop order be changed to increase the risk on a trade, but only to reduce it.