Plan Your Risk Before You See The Reward

Placing the stop-loss logically is important but you would see some professionals get out of the trade before the set loss gets hit. The professionals are able to see some signals in the candles and the price and volume action that makes them realize that they have been proven wrong by the market. However, this is not just a blind guess but a reason that is based on logic. Thus as a starter, you should not try this method because you may tend to be biased.

The more time, the more money.

 

There are basically two ways by which you can exit the trade:

  • When the market hits the set stop loss price which you had placed as soon as you had entered the trade.
  • Exit the trade manually because the price has performed an action that goes against your trade position

Emotion-based exits

  • You should never enter a trade without planning your risk on the trade. If you do so then if the trade does not move in your direction then you would get a margin call since the trade would have moved so much further away that the broker would have to close the trade automatically.
  • You should never close trade manually just because you are biased and think that your stop loss may get hit. You may start feeling emotional that the market is not moving in your direction. But there is no logical reason why you should do so.

Why do you need a stop loss?

You need a stop loss so that you stay in a trade until the market proves you wrong. See this to know more. The method of placing the stop loss is such that the trade gets room to move or as is explained technically the room to breathe. When you are looking for the best place to place the stop you want to place it in the closest level that is logical. This will let you know that the analysis is wrong.

You do not want the stop to be placed very far off nor should it be placed very close to the entry point. You need to give it place to move as well as where you can take it out immediately as soon as the market signals that the trade is wrong. So basically there is just a fine line here which one needs to understand to place the stop loss. And ask any professional trader and he would tell you why placing the stop loss are such an important aspect of any trade. It thus needs a lot of thought and a lot of time to know where exactly to place the stop loss.

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