From time to time we get questions on using stop-loss orders with fractalerts. Some of these questions are:
"Where do you put your stops?"
"Do you issue stop loss and take profit levels?"
Here is our answer to these questions. We will give you a hypothetical.
“I bought $STOCK at $10.”
“I really think it will go up to $15.”
“Just in case it doesn’t, I’ll set my stop loss order at $8.”
“That way, the most I can lose is 20% of my money.”
On the surface, this sort of thinking seems logical, maybe even prudent. This investor is using a stop to prevent a worst-case scenario: being wiped out by the stock dropping to $0. But here’s the thing: relying on stop-loss orders to “avoid” risk is completely backwards. A stop-loss doesn’t mitigate or prevent the risk in your trades: it just locks risk in.
If you want to manage or eliminate risk, there are plenty of ways to do so: portfolio planning, hedging, diversification, buying T-bills – but stop losses aren’t one of them. Stops and targets are wonderful ways to lose money. Generally speaking, they are an indicator that you’re taking too much risk.
So what about fractalerts?
Mathematical patterns are infinitely repeating and thus a stop or target would take us out of a pattern before it has been completed. In effect, our programs are the stop. When they identify a changing pattern, a new alert goes out and a new trade is placed.
Rather than use a stop, just take smaller positions and allow the markets to breath as patterns develop. This also removes the emotion of trading which will always results in losses.
"Where do you put your stops?"
"Do you issue stop loss and take profit levels?"
Here is our answer to these questions. We will give you a hypothetical.
“I bought $STOCK at $10.”
“I really think it will go up to $15.”
“Just in case it doesn’t, I’ll set my stop loss order at $8.”
“That way, the most I can lose is 20% of my money.”
On the surface, this sort of thinking seems logical, maybe even prudent. This investor is using a stop to prevent a worst-case scenario: being wiped out by the stock dropping to $0. But here’s the thing: relying on stop-loss orders to “avoid” risk is completely backwards. A stop-loss doesn’t mitigate or prevent the risk in your trades: it just locks risk in.
If you want to manage or eliminate risk, there are plenty of ways to do so: portfolio planning, hedging, diversification, buying T-bills – but stop losses aren’t one of them. Stops and targets are wonderful ways to lose money. Generally speaking, they are an indicator that you’re taking too much risk.
So what about fractalerts?
Mathematical patterns are infinitely repeating and thus a stop or target would take us out of a pattern before it has been completed. In effect, our programs are the stop. When they identify a changing pattern, a new alert goes out and a new trade is placed.
Rather than use a stop, just take smaller positions and allow the markets to breath as patterns develop. This also removes the emotion of trading which will always results in losses.
Our alerts are used by banks, fund managers and traders all over the world.
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