Even the best trading techniques struggle to deliver a success rate of more than 70%. Therefore even using some of the best trading techniques we will still end up with two or three losing trades out of every ten. For these losing trades we must keep our losses really really small. To do this we use a stop loss. This is a pre-determined price that we use as the trigger to sell out of a losing trade.

There are only five possible outcomes from any trade:

A large profit.

A large profit.

A small loss.

A large loss.

A large loss.

That’s it. Five possible outcomes, no more, no less. Every single trade will result in one of these five outcomes. Now if we could eliminate one of these five outcomes, which one would we choose? That’s right – the large loss. If we eliminate the large loss we are only left with the other four possible outcomes. If our small losses, breakeven trades and small profits even out over a period of time we will only be left with the rather pleasing occasional large profit.

By now you should be in no doubt about the wisdom of eliminating large losses. The Stop Loss is what we use in every trade in order to eliminate any large losses.

We use a Stop Loss Rule. The stop loss rule has three parts to it:

1. Always have your Stop Loss in place for every single trade that you do.

2. Set the Stop Loss price at a level where your loss will be 2% of your trading capital.

3. When your Stop Loss price is hit then you must sell. No ifs, no buts, no maybes. No waiting one more day/week/month/year until your trade turns into a “long term investment”.

The most difficult part of this rule is part 3, selling when your stop loss price is hit. It’s the most difficult part of the rule because most of us hate admitting that we are wrong about anything! Despite this huge emotional drag not to sell – sell we must. When your stop loss price is hit you sell. Sticking to this simple and straight forward rule will protect your hard earned cash when you trade.

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