Why should I use Stop Loss Orders?

I write this because I read a thread on elitetrader.com some time ago in which someone said that stop loss orders are for losers. That means, if you use stop loss orders you will lose in the markets, so the best would be not to use them.

But before continuing,

What is a Stop Loss order?

Stop loss orders are those that a trader uses to limit his losses in the market at a predetermined price.

For instance, if we buy Google at $540 we may place a stop loss order if the stock falls below $510.
There are a lot of people who decide not to use stop loss orders. It is a legitimate decision, of course, but a very dangerous one. Only fund managers that are the whole day watching the markets and professionals of the industry should do it.

There are some people who try to trade with mental stop orders, which means that they will sell or buy the asset when the price has reached their target price. The problem with this is that a lot of these traders sooner or later will violate their mental stops. They will fall prey to their emotional bias thinking that the price may reverse. There are thousands of bankrupted accounts that have tried that.

However, there are some disciplined people who can use those mental stops efficiently.

For a novice trader, I would say that he should use stop loss orders.
The thread at Elitetrader.com gives us some clues about the real problem people who try to trade futures markets have. You can see it here for instance:

Most SMALL TRADERS add to average down/up by every tick or point are doomed to fail and will blow their tiny account ($5K, $10K, $20K, 50K) in no time. THEY WILL FAIL!

Stop Loss day trading

What happens is very simple: it seems obvious that they are doing day trading. When you try to trade futures with 5k, 10k or 50k accounts, you will not make much progress. To trade futures effectively, you need a lot more than that.

Also, you need to forget about day trading. People who do day trading in futures, no matter the account size, will almost certainly fail.

Small Traders are taught by 3rd party educational and system vendors to place stop to manage risk and yet they represent more than 90% of the small traders lose!!

Stop loss strategy day trading

The majority of those traders do not lose because they use stop loss orders, but because they do day trading.

What most systems vendors and 3rp party educational people are promoting is day trading. Brokers and market makers are very happy if you do day trading too.

You know, if you want to be a day trader what you have to do is to try to become a market maker or work in a brokerage.

As genuine speculators, we should look for longer timeframes and the trend. For those elitetrader.com thread members, I would say:

– First, stop doing day trading in futures.

– Second, if you want to do swing or trend trading in futures you will need a lot more than $50k.

– Third, try to learn medium term trading, which can be done with stocks, futures or even forex.

– Stop losses are not the cause of your failure, but a useful resource for managing risk for retail traders. Because if you are a retail trader who tries to swing trade the market you may not have the whole day to be in front of the computer, so stop loss orders may help you to manage risk. They are not a panacea, but they are not necessarily bad either.

Good trading.

 

Related Post