Friday, 3 April 2015

What is Entry, Stop Loss & Take Profit?

What are all these mambo jumbo that you see on the charts? 
What is this indicator for? 
What in the world is the chart telling me? 
How can you tell where the price of a stock is heading based on the charts alone?

These were only a small fraction of the number of questions I had before I started trading. After reading a bunch of books about investing, surfing through countless sites and attending seminars which focused more on advertising their platforms rather than actually teaching me about trading, I came to a conclusion that trading is very subjective. There's no right way to trade or one magic formula you can apply to guarantee a 100% win rate.

But today I want to share with you what are "Stop-Loss" and "Take-Profits" and "Entry Price"

I have mentioned them before in previous post and some of you might be scratching your head wondering why are these price levels so important to me.

Entry Price

The entry price is the price that you set to enter the market, be it a long (anticipating the price to rise) or short (anticipating the price to fall) position. 


This price level, TP for short, is the price level that you have determined to exit the market and take your profits. Before you even enter the market, you need to have a predefined plan as to when to exit. If not, you'll be entering the market without a goal in mind and this lack of objectivity could jeopardise your unrealised earnings. 


This price level, SL for short, is the price level that you have determined to exit the market with a loss. This level is more important than your TP because knowing where to cut your losses is more important than knowing when to take your profits.

Humans tend to take their profits to quickly and cut their losses too late. But when it comes to trading, it should in fact be the other way around. It's human behaviour, the point is to ensure that you are disciplined enough to make decisions not based on emotions and not let losses or greed affect how you trade. 

So, before even entering a trade. You should have these 3 price levels identified. The question now is how to identify them. That will be for another post.

As always, happy trading!



Post a Comment