Profitable ETF trading strategies: the importance of the initial capital preservation stop
Chat rooms and discussion boards are filled with the talk of what to do about stops for active traders? This discussion can seems take on an almost religious fervor and I have never actually seen a single discussion thread where anyone’s mind was ever changed or consensus was ever reached.
That probably relieves me of the burden of trying to convince you one way or the other and simply let the described my thoughts on stops and how I apply them to my own trading. It’s not impossible that something I say may trigger a similar idea that you can apply in your own trading. That’s my hope. my strongest belief about stops actually does take on an almost religious belief in its importance and purpose. That is my belief in the importance of placing your initial stop in the market immediately after entering your trade and leaving it alone, never to be lowered.
I feel so strongly about this belief, that on the day that I’m no longer able to do this I will hang up my trading career and walk away. I believe it’s that important.
Your initial entry into the market is up function of your belief in the edge that you perceive you have and how it applies to the current conditions of the market.
This insight comes with it your analysis of what price action would convince you that your positive outlook is wrong. In passing, if there’s no price that would cause you to change your mind and I would advise you not to quit your day job. once you have anchored your initial capital preservation stop in the order book, you can monitor your reward to risk ratio was a function of the profit targets that emerge as reasonable based on subsequent price action. You don’t know what prices going to do after you enter, but you can be sure about the price that will tell you your initial idea was wrong.
The market will tell you if you’re wrong, and if you cannot put your initial stop in the order book and deal with it, then you’re not prepared to admit you’re wrong and you’re not prepared to be a trader.
By placing your initial capital preservation stop in the order book, you have established the lower limits of uncertainty based on your best knowledge and skills at the time.
To adjust this stop lower at any time after you have entered the trade is to mistrust your judgment and would be an indicator that you’re not prepared to trade that position to begin with.
By putting this stop physically in the order book you have established your belief in black-and-white. This will be the source of great psychological strength for you to record trading career.
And when you can take a professional loss when the price moves immediately against you after your entry, you can consider yourself to be a trader.
In my years of trading, I have never seen anyone trade who could adjust their capital preservation stops lower on the fly for some psychological and analytical reasons.
It has always led to the disaster on their part.
I’m not saying that these people don’t exist, it’s just that I have never met any of them in 20 years of active trading.
You will do what you’re going to do, but I recommend you put that order in the book.