Adhering to an initial stop and exiting a position is an admission that your trade has not worked. From a trend following perspective, adhering to a trailing stop and exiting a position means that the trend has exhausted itself, and the stop has been set at a level consistent with the rules of a system.
I only ever get taken out of a position when my stop has been hit. I do not manually exit a position, as that overrides one of the very basic rules of trend following. You must never work to price targets and potentially restrict profits (NOTE: I do use the Uniform Risk Exit as described in my e-book, however that is used very sparingly and only when certain conditions arise, and even then, is not a complete closing of a position).
Failure to adhere to a stop may, once in a while, mean that you remain in a position which then reverses back in your intended direction. You may even end up making a profit. However, it is always preferable to adhere to your stops. Why? Failure to adhere to a stop may lead to any of the following:
- An erosion of hard earned profits on a position;
- A small loss becoming a bigger loss, that may cause significant damage to your equity;
- Some people keep on holding meaning a short term trade becomes a long term investment, tieing up your capital.
- One mans pull back many be another man's trend reversal - and both look the same when they start;
- I control what I control - i.e. I control and restrict how much I can lose on one trade.
Some people think that losses only become 'real' when the position is actually closed. That is NOT how any successful trader sees it - a paper loss is a very real loss.
On a positive note, if you are using a system with positive expectancy, taking a loss means you are one trade nearer to a big winner.
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