Michael Kirwan provides this article thanks to its original author, Joiner Freeman.
Joiner Freeman is Investor and regularly blogs on http://www.MakeFriendsAndMoney.com/blog on subjects related to Trading, Internet Marketing, Real Estate, Network Marketing & Personal development.
What is the number one rule suggested by literally 1000s of futures brokers and traders for last 20 years:
Use STOPS.
Over 95 percent of the people we have surveyed recommend the use of stop loss orders as one of their top five trading rules. A stop loss order is an order you place at a predetermined price to attempt to liquidate your position if the market moves against you. Its purpose is to attempt to limit your loss. However, you must be aware that there is no guarantee that your stop order will be filled at your price. Occasionally there are market conditions, such as fast or locked-limit markets, where your stop order may not be filled at your price.
Here are some typical comments from experienced brokers and traders regarding the use of stop loss orders: "Enter your stop loss order immediately after your order is filled. Don't use mental stops. Mental stops get moved."How do you determine where to place your stop? The placement of any stop order should be an integral part of a written trading plan that includes good money management rules. For example, if your trading plan calls for trades with four to one risk/reward ratios, place your stop accordingly.
The best way I have learned over the last 20 years is to place stops on the basis of how much money I am willing to lose on a trade. This amount is always a percentage of the equity I have in my account. And I don't count the equity I have in any open positions.I never, or almost never, risk more than three percent of my capital on any given trade. Therefore, I enter my stop as soon as my order is filled. I place my stop order at a point where I would lose no more than three percent of my money if the market goes against me and my stop order is filled. This percent rule also depends on my trade and how much money I have in my account at the time.
Sometimes I may risk no more than one percent of my equity. But I don't want to place my stop so close to the market that a little blip will hit my stop. You also must remember that there is no guarantee that your stop order will be filled at the designated price. Stops can be and are missed sometimes in fast markets.
There can also be locked-limit markets where there are no buyers or sellers to take the other side of your stop order and get you out of the market!Absolutely, positively, no exceptions: Enter your stop order immediately after your order has been executed. Don't remove it. Don't ever move it farther away.I finally stopped those big losses when I started using stops. I watched several brokers in our office for several years, as well as my accounts.
The accounts that lost the most were clients who would hang on to a losing position. They would 'get married' to a position and stay and stay. Look around you. Study your own trading. The odds are overwhelming that you lost most of your money in those trades where you stayed way too long. If you had entered a stop right after you initiated the position, and not moved it, you would have limited your losses, which is the key to successful trading, or my trading, at least.Use stops.
Figure them out ahead of time, when you have a clear head are not thinking crazily because the trade is going badly. Place them as soon as your order is filled. Do not move them, even one tick, unless you have a profit, and then move them as a trailing stop to protect your profits.
Use stops. But you must be aware of their limitations. You must realize that your order will not necessarily be filled precisely where you have placed your stop. You also must realize that occasionally mistakes can be made. If you trade stocks, you know that it's possible for orders to be lost, or taken or placed incorrectly. The point is that just because you place a stop, doesn't mean you can walk away from a trade and assume everything will be perfect. You must take an active role in your trading and your open positions.
Stay tuned for more stock trading insights from Michael Melville Kirwan