Today's Quote: “Failure doesn't mean you are a failure... it just means you haven't succeeded yet.” Robert H. Schuller.

Today’s topic is perhaps the biggest one you will need to conquer. It is the reason why the vast majority of traders fail. It covers both technical concepts and psychological ones. Like most of these issues, it is the psychological one that hurts traders the most.

The topic is the one of stop losses. Let’s review a few facts regarding trading. Fact number one; most traders do not make it in the long term, especially those who do not get training. Fact number two; most traders who fail, do so because of not following their stops. Your goal is to get to the point where you follow stops like a reflex, just like you would jump out of the way of a speeding car. There is no in between. Either you follow them or you don’t.

Most people don’t realize that the primary stop loss comes from the chart — it's the location on the chart where the stock should not go if the targeted play is to work as expected. You really need to know the stop first, so you can play the right number of shares so that your maximum loss on a trade is within the limits you have set out in your trading plan. You can’t change the stop, as that would violate the integrity of the play. You can adjust your share size to make the potential loss within you limits. You can pass on the play if it does not fit into your plan.

Once the initial chart stop is set and deemed appropriate, traders can set stops, if their plan allows them. For example, a trader can add a time stop — if this play does not succeed by the end-of-day, I'll exit or if I find a much better place to invest my time and money, I can close this trade and play the new, better trade.

Stops can become difficult for traders for a variety of reasons. If you ignored a stop once, and it worked in your favor, it may have been one of the worse breaks you have ever received. Oliver Velez in his book “Tools and Tactics for the Mater Day Trader” calls this “winning the wrong way”. It teaches you subconsciously that you did the right thing when you did not. Tracking your results and reasons for making bad trades would reveal to you that this is not a good system to follow.

The other reason is the simple adversity that we all have to not be a ‘loser’. Unfortunately, most new traders equate a ‘stop’ with being a ‘loser’. Nothing could be farther from the truth. If a stock stops and you lose 30 cents, but it continues down two dollars, are you a loser? More important than this is the realization traders acquire when they get more experience. That is simply that when following your plan, it is part of the plan to have some losers. That is right. We don’t want them, but they will be there and the only secret to success is to make sure that you pick plays with appropriate stops, and that you then follow your plan.