Candlestick Trading Blog

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Check out our Stop Loss Strategies & Techniques Training Video!

A 'stop loss' is a pre-defined point at which you will get out of a position in a stock based on the idea that it is not moving in the direction that you had anticipated. Every successful and experienced trader utilizing the basics of stock market investing will tell you that establishing and adhering to a reasonable stop loss is extremely important if you are going to make profits in the long run.

There are many reasons why traders will not sell shares when a loss is imminent. This is problematic because there will be many occasions when a trade they enter does not head in the right direction. At times, it is difficult to adhere to the rule of 'cutting your losses' when it obviously the right thing to do. This is often done by traders who feel a strong sense of greed and fear, or an unearned feeling of self-confidence, and may find it difficult to close the trade because, in doing so, it acknowledges the fact that they got the trade wrong in their minds. This may be a bitter pill to swallow so the easier option is to keep the trade open in the hopes that their ego will not be adversely affected. Yet, they will be violating one of the most important trading rules there are. To most traders, the idea of not closing a trade at a loss means that they haven't had a loss despite the fact that they may have a larger loss down the road.

A detailed plan that guides successful traders when to close positions is one of the things that separates them from the majority of the stock market community. For them, this is a necessity. It is fair to say that a lot of traders don't have a clue about what conditions would warrant closing a trade. It is also fair to say that the majority of market participants routinely adopt a 'buy and hold' approach.

While a stock market investing strategy will always require decision making, there are no more important decisions you have to make than when to sell shares. This part of trading is often overlooked its importance is frequently underestimated. The act of buying simply puts one in a position where money can be made. It's the act of selling a position that is directly related to whether or not any money is made from the trade.

When it comes to considering your stock market investing strategy for exiting, what is important is not the manner in which you decide to exit, but the fact that you have a plan in place to advise you when to exit. What is also important is that you remain consistent in whatever approach to exiting you adopt.

Selling shares is probably the most complex money management decision you will face but, as a rule, it is the most important. The decision is especially difficult when you are faced with a loss and all you want to do is wait for the shares to return to your buying price. When the shares move away from you, making your loss even greater than you would have ever imagined, it makes the situation even more difficult.

Regrettably for many traders, they cannot bring themselves to set stop losses. If they do, they abandon them when the pressure is turned on. To make money investing in stock, cutting your losses is one of the most important trading rules there is. If you fail to do that, you are most likely going to be worse off for it.