The holidays are over and a new year is upon us. We're all rested, recharged, and eager to start trading. Some traders had a profitable trading year in 2008, while some traders had a rough ride. The NFA tells us that 90% of all people who open a retail brokerage account close their account after losing all the money in that account-and the average account is closed before twelve months has gone by! If 2008 gave you a rough trading ride, you may be wondering how to improve your trading this year, and even if you had a profitable trading year in 2008, there are always things to work on to improve your bottom line performance. I thought I'd start out this year with an article that highlights the most common problems I see when teaching traders how to be better traders, either in my group mentoring program or in my one-on-one mentoring program.
Always use stop loss orders! I don't actually see this problem in either of my mentoring groups, because I do extensive screening before accepting anyone for either program-and I refuse to work with anyone that does not use stops anytime they have a market position. But I am constantly amazed by the number of traders, experienced and inexperienced, that don't use physical stop orders (versus mental stop orders or no stop loss orders at all.)
While managing professional traders at a large institutional trading desk in the 1980's and 1990's, I watched some of my best traders literally destroy their careers when they failed to use stop loss orders. They were relying on mental orders, and froze when their positions turned against them. And at the exchanges, a week doesn't go by that someone tells me about an acquaintance that went "tap" because they failed to use stop loss orders. And saddest of all, a young trader that signed up for one of my seminars last year E-mailed me a week before the online event to tell me that they would not be attending because they got caught long in a plunging E-Mini S&P market and lost all the money in their trading account-because they failed to use a stop loss order as protection.
Stops are your friend! They protect you when things go wrong-and keep you in the game! The number one thing I feel every trader must do, this year and every year, is use stop loss orders for protection. I know many traders feel that as soon as they enter a stop loss order, the "players" will find their stop loss orders. And they'll be stopped out of their position just before price makes the large move they were looking for.
With a little knowledge about the price structures that appear regularly in the market, it's easy to find logical areas to place your stop loss orders. These areas act as buffers that stop or slow price's advance or decline before it reaches your stop loss order-unless you have totally misread the market. And if you have misread the market, your stop will be hit, but that will be a good thing, saving you untold amounts of money. If you use stop loss orders intelligently, they can give you protection you must have and still give your positions enough room to mature.
Please use stop loss orders every time you take a position. The markets are always right and none of us can afford to fight the market. If you get stopped out of your position, take a break and refocus. Once your thoughts are clear, look at the charts with a clear and open mind for new trade entry set ups.
To be continue in Part 2 of 5.
Timothy Morge
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