In This Chapter
Exploring some options for protecting against losses
Spreading out your bets
Even the best traders make mistakes and lose money. In fact, good traders lose money at times even when they don’t make mistakes! No certainties exist in trading. It’s all about managing probability scenarios. Therefore, even high-probability trades, executed perfectly, will sometimes turn into losers.
You never know ahead of time whether any one given trade will be a winner or a loser. So you need to manage your risk, knowing that any trade can lose money. Traders commonly use protective stops (an order placed at a price at which the trader wants to limit losses if a trade turns sour). I personally always use hard stops, which are orders placed into my broker’s execution platform. However, stops don’t always protect you.
Other than using stops (which may or may not be filled where you want them to be), many professional traders hedge their positions. This involves taking a position that offsets the risk of your primary position. I introduce the idea of hedging positions in this chapter.
One of the most common ways to hedge a primary position (a stock, forex, futures, ...