Kenny Rodgers had a popular hit with this title that spoke of the gambler's need to manage risk and stay in control. As a trader you too must control your risk and manage your trades but trading is not gambling, it is more like farming or adding a new product to business's product line. Setting stops must be seen as the limits and tactical tolerances of risk that would go into any new venture.

Setting stops is very difficult for almost all traders to master. Virtually everyone accepts that there is good reason to use stops but misusing them is the most universally committed sin in trading. Forgetting to use them is common and using "Mental stops" is essentially the same thing in my book as mental stops are almost never executed. Here are some ideas about using stops that may help but it is not possible to explain and train the skill of using stops in a short article. I would invite you to join me in the Trader's Forge for two days of intensive and supervised trading. Being coached through nearly 10 months trading experience in two days is the most effective way to learn trading skills particularly setting and using stops.

The hardest thing to teach traders is to follow through with a plan. It seems that if a grown adult says "Ok, when it does that, I will do this" they should be expected to follow through but when it comes to stops, all kinds of crazy and unfortunate behavior is triggered.

The challenge in trading is that folks tend to take it personal and to revert to short sighted reactions. Therefore their reactions under pressure are based on immediacy and expediency. Now when touching a hot stove you are justified in acting first and evaluating later, better safe than sorry right? But trading is a strategic and tactical encounter with a market and or stock that you can not control. The only control you have is to enter and to exit. The stop is a vital part of the process that impacts survival and profitability. It must be used rationally and objectively which is rarely the frame of mind a trader is in when the stop is needed most.

A big part of the challenge is that formulas don't work. Setting stops is neither a science nor an art; it is a combination of the two. There are some guidelines that will serve you well but the bottom line is that the traders of different stocks can have markedly different styles and tendencies so what works on one stock may or may not work on another. If you are trading EBAY you need to get a handle on the habits and tendencies of the EBAY traders to know how close and when to move your stops. This is why I have such a problem with the popular approach of using a percentage stop. A trader using a percentage stop basically admits they have no ability to read a chart. It may be better than nothing but it clearly does not allow the trader to take into consideration the characteristics of the stock's behavior.

One of the really tough things to teach folks is to leave money on the table. That is to hold a stop at a level that exposes significant profits to the coming day's potential movement. Often the objection goes "yea but I am leaving a $2.50 profit unprotected". That line of reason reveals the trader's lack of perspective. That $2.50 is not yours unless you are ready to take it off the table. The question is "Are you ready to leave the trade?" and the answer is usually " No, but?" Well, until you close the trade it is the house's money so to speak. When you place a stop strategically you are deliberately exposing a portion of the gains to keep the door open for the greater potential gains or the rest of the trade.

Here is another challenge in the trader's perspective. When the trade is set up there must be a goal. From the pattern there will be some sort of a target. If the target trade is for $5.00 then the first $1.00 move is 20% of the target profit. If the Target move is $2.00 then $1.00 is 50%. That right there is a major key in determining when and how far to move your stops. Is the trade just getting started or is it well underway? The play has to develop and you don't make your first move until there is significant movement toward the target.

Average daily movement also affects the proximity of the stop. The larger the daily swings the more room you have to give the stock initially and the sooner you may get a hit if you are using a trailing stop. "Past is Prologue" and people / traders are creatures of habit so you have to allow the past to color your approach to moving the stop.

I believe the biggest single factor is fear. It involves perspective and it is two fold. First, how the trader sees the profit that develops in the trade may sabotage any good plans or intentions about when and even if stops will be used. Second, how the trader reacts to any reversal behavior of the stock. Fear drives both.

Fear of leaving profit exposed can make a trader move the stop too soon and put them in the way of normal price swings. The profit target must remain in focus and not be redefined by each .50 gain. Fear that the trade is attacking their profit can cause the trader to move the stops too soon and too close. Trades often lose that perspective as soon as there is some profit on the table. A football analogy comes to mind here, "You don't run a 2 minute drill in the first quarter".

Fear that a trade is reversing can cause panic. The solution, as stated above is to keep the big picture or plan in mind but when the trade turns on you there is a fight or flight in reaction in many traders. The emotional response is the same as being attacked. Old memories may trigger a reaction to close the trade before they get "hurt again" but in trading you MUST stick to the plan! If a trade reverses suddenly to a negative position, it sounds odd, but many folks react by removing their stop. Better to give it a chance to recover than to exit now as a "Loser" but this almost always leads to a worsening situation. There is a term in the military that says "No matter how carefully made, the battle plan rarely survives the first engagement" and while that reflects the dynamics of many changing variables traders must have a plan to follow in the heat of battle. The stop strategy that was planned out beforehand must not be adjusted under fire.

OK, so while there are a lot of skills to learn and hone, your skills at setting stops must address some basic principles that are designed to

1. Get a good starting position

2. Protect windfalls

3. Make the right first move

4. Allow for retracements

5. Choke up on the bat when you get close to the target

You will learn this best by actually doing it. In the FORGE I train traders to set stops by taking them through trades one day at a time in the Simulator doing repetitions with many scenarios over several weeks of a stocks history. There is no better way to learn than in a realistic simulator that lets you make real decisions with out financially lethal consequences. Nothing trains trading skills better than trading with a coach. Repetition and review!

As the play develops to the downside a bearish position is taken. Note that the dot (representing the stop) under each day is set in place before the market opens. Also note that the stops are moved with caution until the stock approaches the target. The Trailing stop (set to capture a quick test of the target) catches the intraday dip to support and locks in almost 100% of the projected target profit.

This is a simple example and trust me, there is much more to learn but some of the basic steps are illustrated. The big candles have small upper tails but until we get close to the target we keep the stops near the opening. This leaves a lot on the table but also allows the occasional whip saw to play out with out closing the trade prematurely. The trailing stop will make sure a quick test of the target price is not missed.

As I have stated, the best way to really learn to set stops is to trade. The TRADER"S FORGE is the finest trading training process there is. About 10 months of experience is gained in the two days of trading. That's 10 months of charting, reading candlesticks, drawing lines, setting and moving stops. I hope to see you soon. Check the dates and locations available over the next few weeks. I guarantee you will leave the FORGE with better trading skills than you have now. Training with a coach is always the best way to acquire and develop skills.

See you there.