Avoid losses through better stop loss management.
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Too often, traders set their stop loss too close to the entry price, driven by the fear of loss. For example, you buy shares for 100 PLN and set the stop loss at 98 PLN. A small market movement is enough to get rid of the position before the trend turns in your favor. Another mistake is ignoring transaction costs. Let's assume the spread is 1 PLN, and you set the stop loss just 2 PLN below the purchase price. In practice, after accounting for the spread, you are risking more than you intended. Additionally, slippage can deepen losses. If your stop loss is set at a level that the price quickly reaches, there is a risk that the transaction will be closed at a less favorable price.
A too tight stop loss limits the position's ability to 'breathe' with the natural volatility of the market. Markets often move chaotically before determining a direction. When the stop loss is too close, you risk closing the position due to small, random price movements. This does not give you a chance to take full advantage of the market's movement potential. It reduces the likelihood of profitable trades and can lead to frequent losses, even if the analysis was correct.
Assume you have a capital of 10,000 PLN and you risk 1% of the capital on a trade, which is 100 PLN. You set a stop loss that is too tight and as a result, you lose 3 out of 4 trades, each losing 100 PLN. This results in total losses of 300 PLN in a short time. If we add 20 PLN for transaction costs (spread and slippage), the losses increase to 380 PLN. In the long run, such an approach can reduce your capital much faster than you anticipated, decreasing your ability to make further potentially profitable trades.
Analyze your stop loss settings and their effects on your trades daily.
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