Managing Risk Using Stop Losses:
Managing risk is one of the most if not the most important characteristic of a successful trader. It is not something that you develop overnight, it is important to learn all the tools at your disposal and identify using different trades which risk management tool is best in various scenarios. Managing position size, managing stop loss orders and utilizing option strategies are integral in helping to manage risk and protect your capital.
Using a stop loss DOES NOT guarantee a maximum loss. As we saw just recently in February of 2018 when the market moves quickly there could be slippage from your stop loss level and your losses could exceed what you thought was worst case scenario. That said, stop loss orders are vital to reduce your trading risk and protect your downside.
When you are considering a trade and using stop loss orders you also need to consider liquidity and the time of day your order is in the market. Many futures markets now trade around the clock, but overnight markets have less liquidity. Markets often see exaggerated moves since many leave stop loss orders in the market.
Occasionally, rather than keeping a tight stop in the market overnight you might want to consider reducing your position and widening your stop level to avoid getting whipped out of a position near the high or low of the day.
We discuss different ways to utilize option strategies to reduce your market risk in the community live stream daily.