As traders we are faced with multiple decisions each day. This could include deciding when to enter a trade, deciding if what we see on a chart is valid, deciding what a reasonable price target might be and deciding where to place a stop loss in case a trade goes against us. And these are just a few examples, let alone having to be ready to quickly change strategies without much warning if necessary.
The decision making process is made much easier if we feel confident with our work. For example, if I am confident in my technical analysis skills, it gives me an advantage over those who might still be learning. So if I see a stock is closing in on a major level of support, that the stock is technically oversold and that the stock has formed a positive divergence, I know right away that the odds are in my favor. Thus, if I decide to take a position, it's because I feel strongly that there's a good chance I will be on the winning side of the trade.
Of course, as we all know, the market has a way of thwarting even the very best of plans. So, before I even enter a trade I need to have a back up plan, in case it goes against me. This requires me to set a stop loss, and one that is "defensible"; that is, I can confidently defend the reason I set a specific stop loss; no guessing allowed.
For example, take a look at the chart on Cisco below and let's assume I had been watching CSCO for a while and I liked the fact that it had recently closed back above both its 20 and 50 day moving averages so I take a position right at the end of the day on April 16 at an entry price of 28.60. And also assume that I had decided before I entered the trade that I would allow it 7% to the downside - just "because" I didn't want to lose more than 7% - so I set my stop loss at 26.60. The question becomes, what on the chart shows that 26.60 is a good place to set a stop? And the answer is, it doesn't. But if I had decided to set my stop at a close below the 20 day moving average of 27.86, it would have been because I knew it would be important for CSCO to hold a key technical level or it could move lower.
The point to all of this? If you are going to put your precious capital at risk, you need to feel confident that are capable of making good decisions, because if you are confident in your decision making you will be in a better position to execute along the path of a trade. In fact, you should strive to be "decisive to a fault" so when the time comes to push the buy or sell button it comes easily instead of worrying if what you are about to do is the right thing to do.
By the way, I will have a new and free "Chart of the Day" that will be released on Monday before the market opens that will be worth checking out so just click here if you want to be added to the list.
Committed to helping you succeed,
John Hopkins
President
Invested Central
