Why Stop Losses are Counter Intuitive

(Source: Forbes)

I'd like to start out this article with a personal story. When I first started trading, I made one of the worst mistakes any trader could make, which is to not adhere to your predefined stop loss level. I would enter a trade, if the trade went in my favour, I'd start to move my stops to tighten it. But if the trade went against me, I'd start adjusting the stops to make sure that I wouldn't get stopped out. (You're probably cringing)

If you are new to trading and you're struggling with sticking to your stop loss, keep on reading.

I ended up losing more than expected, and closing winning trades way too early. Perfect recipe to wipe your account out. As humans, we are psychologically predisposed to be excited when we see the small gains. But when there is a losing trade on hand, we become optimistic and hope that it will eventually reverse. Its known as prospect theory people value gains and losses differently.

A simple example to demonstrate this theory would be the following scenario:

Imagine if you could either have $100 now or a 50/50 chance of either getting $0 or $500. I'm pretty sure most of you would just take the $100 although logically, you should pick the second option.

I think I might have a solution to help you cope with sticking to stop losses.

The term "Stop Loss" has a negative connotation to it. It makes us feel like we've made a mistake.

"Stop playing with your gameboy!"
"Stop watching tv!"
"Stop adjusting your stop loss!"

Just things I've heard my mum tell me growing up. Okay, maybe not the last one, but you get where I'm going with this.

"Loss" is pretty self-explanatory.

So instead, let's rename "Stop Loss" to "Start Save". Adhering to the stop loss levels enables you to prevent additional losses saving your capital. It also gets you out of trades that are not going in your favour and frees up your capital for other opportunities that might present themselves.

I hope this has helped you to understand why following your stop loss start save level is crucial to trading.

As always, happy trading.

Cheers.

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[Bearish Setup] - Fedex Corp (NYSE: FDX)

Another shorting opportunity presented itself on Thursday 14/07/16. There was a shooting star formation coupled with other indicators indicating an overbought condition (I will discuss about the indicators in future posts). To sum it all up, I will be taking a short position as I expect a mean reversion to happen within the next couple of weeks.

I took a short position on Friday 15/07/16 at $161.42.

Entry: $161.42
Take Profit: $154.43
Stop Loss: $165.79
RRR: 1.6

Take profit was based on the previous pivot level. One has to note that there was a price gap that occurred a few days after earnings results were released. I will be slightly tighter with my stops once the price is approaching the gap area which is between $156.40 and $154.07

That's all for now, this is my only opened position in my active portfolio. I will be sharing my passive portfolio details in the future! Stay tuned for that!

As always, happy trading.

Cheers.

4/8/16 Update: I am still holding on to my short position. Currently at a small profit, will continue to hold on to this short.

10/8/16 Update: Fedex is now hovering close to my stop loss, I'll be following my plan and not shifting my stop loss

12/8/16 Update: Fedex hit my stop loss, I have exited the position. Losses are part of trading and I look forward to sharing with you the next setup that presents itself!

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[Bearish Setup] - Sallie Mae (NASDAQ: SLM)

This ticker caught my attention after the market closed for NASDAQ. Potential mean reversal trade back to the pivot of $6.33

Entry Price: $6.99
Take Profit: $6.33
Stop Loss: $7.30
RRR: 2.13

Remember that this signal will be invalidated once the price exceeds the previous day high which is $7.13.

As always, happy trading.

Cheers.

Update: The signal has been invalidated as the price has breached the previous day high. I will not be taking this trade.

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