The subject of stop-losses is such an intensely difficult topic to discuss.? I’ve had many latenight debates in trading forums and chatrooms and I’ve been through every camp in my experience as a trader.? The best answer I’ve ever been able to come up with is that answer famous and frustrating for its truth: it depends.

What always bugged me about the stop-loss was the way most traders thought about it.? They basically thought of the stop-loss as a way of defining risk by itself.? These traders found a trade they wanted to be in and then by magically adding a stop-loss of a certain size could then claim, “See, my risk:reward is now 1:2 so I can enter with confidence.”? Woah there, Buddy.? As Jason laid out in his post, a stop-loss does not a trade make.

I personally think that risk management?should always the first focus of any trade.? But I don’t think that stop-losses are the only form of risk management.? In the wrong hands, a stop-loss can increase your risk by raising the probability of the trade ending in a loss, however small.? You can’t win by constantly taking small losses.? Other methods such as careful position sizing, diversification and even lowering trading costs (which give you more room to move) can all be used in various combinations with or without stops to control a trade.

The key goal is to never do anything to your trade tactically that will hurt you before the market has done enough to prove your assessment wrong, including taking profits.? This means that you need to determine what these scenarios are before you enter the trade and then determine the tactics that will best serve you.? Look for price levels for orders that have meaning (S/R, density levels etc.), not just arbitrary prices.? Think about how your orders might be vulnerable to running.? Don’t put them in obvious places.? And you need to actually assign probabilities to events, as strange as that probably sounds to some traders and investors.? If you can’t or haven’t been able to do such, then perhaps you shouldn’t be in the trade.? Oh, and add “standing aside” to the list of risk management techniques.