Preventing a premature stop loss is a very common problem to have and in trading whether in short term or long term. Deciding the appropriate time to exit your trading position is just as important as deciding the best time to enter your position.
Entering a position is less emotional than you think it is and at the end of the day its your exit strategy that determines your total profit. Some traders are tempted to ride the tide a little longer, or in the unthinkable case of the market going against you, your heart tells you to hold tight and wait for your losses to reverse.
This is why setting a stop loss and limit order prior to entering your position is very important, but sometimes the markets can get too volatile, which can result in a premature automatic exit. To avoid getting kicked out of your trade prematurely, the best way is to follow up with a market sentiment and keep up with the economic news.
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While I don’t suggest changing your profit limit order, you can adjust your stop loss by monitoring how fast the market is moving against you. Only if you are confident with your position and have solid information based on the fundamentals and technical analysis and believe the markets will eventually change direction to your favor, then you can loosen up your stop loss level.
To measure the market sentiment, its best to switch anywhere between the 1 minute to hourly chart every once in awhile. Another basic strategy for establishing a basic exit point is the trailing stop method. The trailing stop method simply maintains a stop loss order at a precise percentage below the market price in your long position or above it if you have the short position. The stop loss order is automatically adjusted continually based on fluctuations in the market price – its important to always maintain the same percentage below or above the market price.
You can then relax and know the exact minimum profit your position will gain, but for that you must make sure that you set your risk trailing stop at precise risk tolerance locations and not based on emotions. Also keep in mind that this technique requires patience!
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