A trader\'s money management system

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c07 JWBK182-McDowell April 25, 2008 15:58 Printer: Yet to come

Stop-Loss Exit Rules 57

Risk is inevitable in the markets, and there is an art to managing the

possibilities. It is not a matter of fearing the risk. Instead, focus on playing

the “what-if” scenario so that you can adequately prepare yourself for any

outcome.

SEVEN BASIC STOP-LOSS EXITS

The topic of where to set stop-loss exits generally falls under the heading

oftrading system. Your exits must be carefully coordinated with your en-

tries, and this is a trading skill that must be developed with experience. The

theory of stop selection is really a separate topic from money management,

but they are so connected that it is important to give you an outline of stop

theory as part of our discussion.

There are a variety of stops that you can incorporate into your system.

The following seven are the ones I find most valuable:

1. Initial stop.First stop set at the beginning of your trade. This stop
   is identified before you enter the market. The initial stop is also used
   to calculate your position size. It is the largest loss you will take in
   the current trade. See Figure 7.1, where the first “up” triangle on the

FIGURE 7.1 TheARTSoftware Identifies the Initial Stop and the Subsequent Trail-

ing Stops.

Source:eSignal. http://www.eSignal.com