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Essentially, providing you can master the counter intuitive notion of the trading stop, you'll be well on your way to setting yourself apart from many others in that you'll be able to turn a profit.

I'm sure you've had a few occasions when you've "hung in there" a little too long, but you needn't feel bad because it happens to all traders at some point. Now, we all agree that a small loss is better than a big loss so let's just remember; every big loss starts off as a small loss. The beauty of a trading stop is, when we're experiencing a loss, it allows us to nip it in the bud, before that loss escalates into a big loss. The bigger a loss gets, the more difficult it becomes to apply a trade stop.

Even though we all dread it, trades won't always go exactly as we'd hoped for, and this is where a trading stop comes into play. Essentially, an initial stop is a predefined exit point that allows you to get out of a trade when it's not going as planned. Remember, you could unknowingly enter into a trade right at the end of a trend so therefore, you need to have a predetermined point at which you'll exit. In simple terms, a trading stop is simply deciding to bail out once the price slips below a certain mark.

Becoming a successful trader rests largely with your ability to make decisions which are counter intuitive because when we start taking a loss, it's virtually second nature for us to hold for too long, in the hope that things will change.

To a great extent, an initial stop is much the same as a red traffic light, in that you could always choose to ignore, although that of course would not be a very wise thing to do.

So, just how wide should you set your trade stop? This is a common question, particularly between traders new to the idea of a trading stop, but unfortunately it's a question which cannot be answered accurately. The reason being, the amount of room you allow for price movement will depend largely on the time frame being traded.

For the most part, traders who focus on short term trading tend to set their initial stop close to the price while traders involved with longer term trading tend to allow more room for movement. The important thing is, once you've identified the time frame of your trade, you need to ignore any movements which are considered normal with that particular time frame. The last thing you want to do is end up closing out simply because of some normal trading fluctuation. Remember, a certain amount of movement is normal and is to be expected.

A trading stop which is set just below the trade entry price is known as a tight stop and the problem with this is, if it's set too tight, it could cause you to loose your position within a trade, before that trade has even had a chance to recover. On the other hand, a looser trading stop won't trigger an exit as quickly, but it could of course result in a bigger loss. The advantage however is, by setting your trading stop looser; you allow a trade more time to recover if it's recently taken a dip.

Essentially, tight trading stops should be avoided if at all possible. Firstly, they could well result in you being closed out prematurely on a regular basis, thus making your trade system unreliable. Secondly, they increase overall transaction costs significantly. Traders with a small float in particular, should avoid tight stops simply because of the astronomical brokerage which is almost inevitable.

Because stops are looser on long term trades than they are on short term trades, I nearly always advise my clients to opt for a trading system with a slightly longer time frame.

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