P1: PIC/b P2: VEV/d QC: e/f T1: g
c07 JWBK182-McDowell April 25, 2008 15:58 Printer: Yet to come

CHAPTER 7

Stop-Loss

Exit Rules

O

ne important way to control your trading risk is by setting stop-loss

exits. A stop-loss exit is a practical tool used in managing risk, and

there is an art to developing the right strategy. On the one hand, you

don’t want to set stops that are so tight that you constantly get bumped out

of the market. On the other hand, you don’t want to be too liberal with your

stops so that you never lock in profit.

The solution is to find an approach that is a balance of these two goals

and is based on market dynamics. Your stop loss strategy should be de-

signed to let your trade breathe and fluctuate with the normal ebb and flow

of the market.

THERE’S A WORLD OF RISK IN

TRADING: A RISK LIST TO LIVE BY

The value of having a stop-loss exit in placepriorto entering the market is

that you can unemotionally determine the best exit possible for the types

of risk listed here. If you enter a trade before you think about where you

are going to get out, you are dancing with the devil. Here’s arisk listthat

your stop exits can help protect you from:

 Trade risk.Thecalculatedrisk you take on each individual trade is

adjusted by changing your trade size. This is the only risk you can

55