Page 390 - THE MARKET WHISPERER

386 PART 11 - Risk Management

market, etc. means “put on hold.” Thus, a stop limit means “wait until
you can execute a limit order at the set price.”
• Not all stop loss orders are orders meant to reduce losses. In many cases,
it is simply a higher exit point for a stock that is rising. For example:
you bought at $30 per share, and placed a stop loss into the system for
$29.70. This indeed is a stop loss. But if the price had risen to $31 and
your stop loss was set at $30.70, clearly you have not absorbed any loss,
in which case the most appropriate term is simply what traders call a
stop.

How to Set the Stop Point

The loss exit point should already be set at the trade planning stage, but
as we will understand soon, we cannot always know in advance exactly
where the exit will be. In any case, even if we cannot pinpoint the actual
exit with certainty, we can plan it in advance. We do this for two reasons: it
is correct professionally, and it is good psychologically.
• Professionally: Before each trade you need to check the risk/reward

ratio. How can you figure the risk if you do not know where the stop is?
Traders who do not set their stop point before entering the trade are
operating very unprofessionally. A pro first calculates the risk, not the
reward.
• Psychologically: Can you set a reliable stop after entering the stock? No.
Once you’ve bought, you are no longer the same clear-thinking person.
Greed taunts you, and fear of loss plays with your emotions, infringing
on the ability to stay rational, and possibly causing you to realize profits
too early or cut losses too late.

Some traders will set their stop before entering the trade, but then the
demon gets to work: as the price approaches their stop, they cancel it and
set a new one further off. What do they do as the price approaches their
new stop? Correct, they reset it. The greater the loss, the harder it is for
them to admit losing. Exiting at loss is a painful event. The human body has
a psychological trait of protecting against pain. Is exiting the stock painful?
Then let’s not hit the button. When they need to choose between the hope
that the stock will turn about and begin showing profits versus the pain of
loss, they choose hope. As the scope of the loss increases, they turn from
short-term traders to long-term investors. They ask themselves, “Why did
this happen?” and then begin searching for reasons to explain the dramatic