Page 397 - THE MARKET WHISPERER
P. 397
THE MARKET WHISPERER 39 3
about an exit with as little damage as possible. The solution is to wait for
a pullback just below the peak. I would set a buy order (in order to exit
the short) at $20.40, hoping that a pullback from a $20.70 peak would
reach $20.40 and allow me to exit with a more absorbable loss. This is
a LIMIT order and will execute only if the stock price drops to my limit.
On the other hand, I would also set a stop above $20.70 in case the price
does not drop, and exit with a larger loss than planned. True, this is not a
pleasant situation to be in, but by comparison to so many other successful
trades providing good profits, a situation like this definitely conforms to
the statistics.
Hard Stop or Mental Stop
• A hard stop is an order placed into the trading platform. If and when the
stock price reaches the pre-set stop, the broker will execute the order
automatically.
• A mental stop is one we decide on in our minds, but do not feed into the
trading platform and therefore will not be executed automatically. We
will execute it manually if and when the stock reaches the point which
we have defined for ourselves.
Each of these stops holds advantages and disadvantages, and we will
later learn how and when to use them.
SMART A hard stop can be serious trouble! Avoid it as much as
MONEY possible and opt for the mental stop. Using it can save you
no small number of unnecessary losses.
What is best: setting a hard stop, or exiting the stock manually when it
reaches the point we have chosen as our stop? The answer will differ from
one trader to the next, and also depends on a trader’s experience. For new
traders, I recommend placing an automatic (hard) stop. It helps you cope
more correctly with fear and will likely improve your achievements. For
more advanced traders, I strongly recommend not using the hard stop and
using the mental stop instead. The reason is chiefly technical and derives
from the unpredictability of intraday volatility. With a hard stop, you may
encounter a situation where a large-quantity seller might cause the price
to momentarily plunge, showing a sharp, fast red candle, and shake you
out at your stop. Then, the price might return within seconds to its original
level. You do not want to be shaken out under this kind of volatility. In most
