Anyone who has been
trading for a while will tell you that stop loss orders are imperative
to prevent disasters that lead to major losses or total blow out. 90%
of traders fail because the have catastrophic losses that lead to
total failure. It is essential to have stop loss protection.
No one enjoys being
stopped out during a potential successful trade, but consider it as
trader’s insurance. You would not consider purchasing a home without
insurance. Nor would you consider it a waste of money if the house
never burnt down and you did not collect on the premium. However, if a
problem occurs, you are glad to have the policy. Stop losses are our
equivalent of an insurance premium and must be considered as the cost
of doing business.
How good is your
exit strategy? It must be tested. Test the exit strategy by using a
series of random stocks, arbitrarily picking entry prices and
direction of the trade. Place your exit stops and begin your exit
trading strategy. After trying 30 to 50 hypothetical stock trades,
check the results of the profits. If the results are at least break
even, your exit strategy is good. If you have a net loss, then the
exit strategy must be overhauled.
