In this post I’m quoting from a book called Trade Like a Casino to highlight reasons why stop losses are so important in trading. If this sounds interesting to you, please read on.
The Book:
Trade Like a Casino: Find Your Edge, Manage Risk, and Win Like the House, is a great trading book written by Richard L. Weisman. As the name suggests, this book delves into the importance of having an edge and managing risk like a “casino” if you want to be successful in trading.
Edge means having a trading strategy with a positive expectancy (which he explains extensively). And when it comes to risk management, the importance of stop losses are seen as an essential component (this being the starting place for risk management, the book goes into much more detail).
What I touch on here is just the start of the book. The whole book is truly a worthwhile read.
The Quote and a Short Explanation:
“The simplest and one of the most essential ingredients in the development of a robust risk management methodology is placement of stop losses. A stop loss is the cornerstone upon which all more complex risk tools are built. Why are stop losses so essential to successful risk management programs? Because a stop loss becomes a market order once its price level has been triggered. Stops force traders to to quantify risk before entry and therefore habituate us to their placement instantaneously following entry. Placing stops immediately after entry means that risk management maintains its objective, rule – based criteria as opposed to being placed after the onslaught of the greed and fear that typically characterize our emotional response to open positions in the markets. The stop order cannot rationalize or debate. It does not understand supply, demand, weather patterns, or geopolitical anomalies. It only knows our predetermined criterion for trade exit has been triggered and therefore forces that exit despite any reason for abandonment of discipline.”
The above comes down to:
- Risk management starts with stop losses.
- Stop losses being simple to implement.
- Once a stop loss is set, it will automatically take you out of the market when hit (taking control away from you).
- Force you to quantify amount you are willing to risk.
- Helps to remove emotions from trading (let the stops make the decisions).
Finally:
Stops are essential when it comes to risk management and successful trading, but they are just the start. Don’t forget that how much you risk and sticking to profit targets are just as important… they all work together.
Thanks for reading. I hope you found this post insightful.
Thanks and Regards,
Trading SOS SOS
