I want to help you become a successful swing trader. There are two main tasks: making big gains and enduring the smallest possible losses. This article is about the latter.
Losses are inevitable in trading because the market can turn against us at any time and because, sometimes, we make mistakes. The more you follow these guidelines the more you will minimize losses and maximize earnings.
Place your protective stop at the same time you enter your trade:
Where should the stop be placed? The place on the chart where you know that the market has turned against you. If you cannot afford the trade (after reducing the amount of shares or contracts), then avoid the trade. This initial placement of your protective stop is your biggest risk.
Have a gain after the first day or two?
Here's your opportunity to remove the initial risk. Move your protective stop so that you guarantee a very small gain (i.e., near a break even). This eliminates the risk of losing money; it's now a question of how much you'll gain!
You weren't stopped out, but the market moved against you on the first day?
When the market moves against you and doesn't do what you expected it to do, get out Most of the time, this will reduce a bigger loss then had you been stopped out. Sometimes, you will exit only to see the market go your way after you've left. But there will be many more times that it will save you money. Follow this rule and enjoy bigger earnings.
Lock in bigger gains as the trade moves your way:
Move your protective stop (up if you're long, down if you're short) when the trade stalls or moves against you a bit. This locks more and and more of your gains and makes you increasingly confident and happy.
How much of a drop should I permit when I'm in a trade?
No stock or future moves in a straight line. Allow a fifty percent retracement, at most, of the last leg up. Here is an example: