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is that as the volatility increases, the protective stop becomes wider, increasing the possible loss if the stop is elected. |
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There are two concerns when placing a protective stop. The first is the amount of money at risk. The second is where the stop is placed. Both of these need to coincide; otherwise a protective stop is just a limitation point loss, and not a pivotal point in the market. |
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Suppose you just went long gold at 301, and there is massive support at 290. You can assume that if the bears suddenly gain strength and start forcing the price down toward 290, the bulls should begin to defend the 290 price area. If the bulls are not strong enough to overcome the selling pressure of the bears, and the price declines to under 290, then the bulls will probably begin to panic. By liquidating their long positions, they will add more strength to the bears, driving prices even lower. Therefore you would be safe in placing your stop at 289 or 288. You don't want to be long if the bears hit 288, as it would represent that the bears are the stronger force. |
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The reason most traders lose their trading equity is poor risk control. Whereas profitability is always desired, it is losses that a trader must be constantly on guard against. The profitability of a trade is never assured; however, the risk is. Trading profits allow us to play one more day; excessive losses prevent us from playing any more. Traders who focus only on profits will often lose all their equity, because of uncontrolled risk taking stemming from their beliefs. However, traders who focus only on risk will never be able to make the trade, because they will prefer to keep their equity in cash. |
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Determining the Expected Outcome |
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Calculating the expected outcome of a trade is a simple way to look at risk and reward. When we calculate the expected outcome, we're looking at the combined chances of a profit and a loss. When we use expected outcome, we can get an indication of whether a strategy will be profitable in the foreseeable future. In most cases a severe loss due to uncontrolled risk factors is rarely more than 10 percent of the contract price. |
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Professional traders will always consider the risk involved in a potential trade versus the potential profit. Novice traders typically focus only on the amount of profit in a potential trade; consequently they lose a lot of |
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