StopHunt replies to: Stop Loss or Hedge It?

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You got a position opened and the market is about to hit your SL (Stop Loss) value. What do you do? Quickly remove the SL value or Hedge it or you just let it go and then smile ?

I think your question is overly simplistic. First of all you have not mentioned any reasons for your hypothetical trade. Most traders I know (myself included) open a position thinking that price will continue to go in the direction of their trade…otherwise why open the position at all. Following this logic then the placement of a stop loss is presumed to be protective in nature. Its whole concept is to protect against catastrophic loss – much like an insurance policy. The idea is you are willing to risk a small amount to realize the potential (and theoretically larger) gains. The stop loss is (generally speaking) placed in a area where – if hit – price action has negated your trade premise and thus you will either reverse your trade premise or wait for another opportunity in the chosen direction.

I cannot say (and you have not stated here) where and why your stop is placed where it is…but if you are using a stop in the above described manner why would you move it farther away and risk even more of your account? Clearly the market has disagreed with your trade premise, either WHERE you entered or WHEN you entered. So you miscalculated and the whole point of having a stop is to limit your risk…WHY would you move it??

Further, if you think price is going to move opposite of your chosen trade…instead of “hedging” why not just stop and reverse? Take an even smaller loss than your original stop, and take advantage of the counter movement in price.

So this then brings up the greater underlying issue (one which you have not addressed here) and the “elephant in the room”. Did you miscalculate your position to begin with? Does your trade premise determination need work? Or did you participate too soon, or too late? Did you actually have a plan with which to execute, or did it just “look right”?

Stops helps us evaluate our own behavior more than that of the market. My advise (not knowing anything further about your position) would be take your loss – and I hope it is a small one. Re-evaluate your reasons for your position. Ensure that you have an edge and are following the conditions that work best for your edge. If all looks good and you would still participate in the same place for the same reasons…congratulations!! Your trade didn’t work out and your stop loss fulfilled its purpose and kept your loss under control. It happens to all of us and it is just part of the cost of doing business.

Remember fear of having your stops hit is kind of like a someone who wants to be a boxer but doesn’t want to take a punch…

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