We have recently started a new mentor program and the new crew are quietly beavering away at their tasks. During this process the question was raised of what to do when you you have a position where price gaps beyond your stop. The stop in this instance was not automated so no immediate action was taken.
It is easy for experienced traders to give the somewhat off hand remark of – it doesn’t matter how far it has gone through your stop it has still gone through it, so do something. And this is precisely the answer I gave and it is the correct answer. However, upon reflection it doesn’t accommodate the lack of experience that many have in dealing with such situations. It is easy to take for granted that in this day of automated stops that this situation can and does arise with people who are new to trading.
I regard the ability to take a stop when price has driven right past your preferred exit as somewhat of a right of passage and is a skill necessary to become a more proficient trader. If there is a traders version of crossing the Rubicon then it is the ability to be ruthless with positions that are showing losses.
Exiting a position where price has gapped down significantly through my stop loss is not what I would call a pleasant experience!
But……I find it reassuring to know that I am actively protecting my capital by closing out positions that don’t cooperate (although much of my capital preservation is done through sensible position sizing in the first place!).
Acting on stops is what I believe to be part of the 95% of trading that is boring, frustrating and just plain hard work. After all, riding winning trades doesn’t take much effort – it’s the culling of the losing trades that keeps me active.