Day Trading Quick Tip # 5 - Never Increase Your Stop Loss

Stop loss orders are additional orders that are designed to exit a losing trade while limiting the amount of money that is lost (hence the name stop loss). Stop loss orders can be used as the primary exit for a losing trade, in which case they are placed at the price at which you want to exit your trade. Stop loss orders can also be used as an emergency exit (also known as a crash stop), in which case they are placed at a price which you do not expect to be reached unless something goes wrong. Either way, once you have correctly placed your stop loss order, it should not be increased under any circumstances.

Stop Loss Orders and Emotion

A correctly placed stop loss order is placed at a specific price for a reason. For example, a stop loss order might be placed 14 ticks behind the entry, because testing has determined that winning trades never go more than 13 ticks into negative territory. With this is mind, there is obviously no logical reason to increase a stop loss, but unfortunately there is an emotional reason to increase a stop loss.

Being in a trade that is a couple of ticks in front of a stop loss order can be very stressful because a losing trade is only a couple of ticks away. The easiest way to remove this stress is to increase the stop loss because this creates a buffer between the current price and the stop loss (i.e. a buffer against a losing trade). This buffer relieves the tension, so it feels like a good thing to do, but in reality all that happens is that the eventual losing trade will be a bigger loss.

Protect Your Money

Part of being a profitable trader is keeping losing trades as small as possible, and correctly placed stop loss orders are designed to do exactly this. The next time you are in a trade that is about to have its stop loss order filled, sit on your hands (which will prevent you from increasing the stop loss), and be glad that the stop loss order is there to protect your money.