How many professional traders still do? How does that compare to the average trader? The short answer: not many. It certainly wasn’t the main reason professional traders stopped using stop losses. But it became the biggest reason. The reasons include the fact that professional traders are usually much better at following up on trades and not just waiting for good information to arrive, and it’s less expensive for them, compared to the average trader. If you do not understand why stop losses are not used, but you follow the advice on this page, you might be confused and annoyed. But that is just the reason for them not being used now. I have a very strong belief that professional traders still use stop losses in an attempt to help minimize losses for them and for their clients.
Is a stop loss a “cheap” way to protect a large portion of your capital? You might think so, but stop loss hedging as a whole is far more expensive for each trader than the basic trading strategies I discuss. Here are the costs associated with traditional stop loss hedging combined with my recommended buy/sell order type trade. The table depicts the cost of using a stop loss as a way to maximize an asset’s returns. I am making reasonable assumptions that have been made by the market so that we can estimate the average cost of each strategy by using that method. I also assume that it takes a long time before trades become profitable and that you are paying only a nominal fee for using a stop loss. To show that these assumptions are valid, consider that the average cost per dollar invested is about 4% of the total cost of trading. This is about $40 per month. If someone decides to use the professional-style strategy, the cost is only about $12, so the total number of dollars invested will be $200 per month and they will have $120 per month to invest.
Here is the table and the associated calculations.
You can make the table as small as you want and still see that a professional stop loss strategy, with a buy/sell order for every stock, will almost always be more expensive than the simple stop loss. If this seems bad, I think that you will be shocked and relieved when you see the figures for the cost of using a stop loss in a year. It is about 1/3 the cost of going long/short. In other words, it turns out to be 1/3 the cost of stopping your money. Or, put another way, it turns out to be about 1/3
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