One of the most common and expensive mistakes made by traders is moving the stop loss on a trade to break even too quickly. It is psychologically attractive to move a stop loss to break even in order to enjoy the feeling of removing risk, but it is usually not a smart thing to do as it tends to result in being kicked out of potentially profitable trade too early. Stop losses should only be moved either after a defined period of time has elapsed, or after the trade has moved in the trader’s favor by a relatively large amount, compared to the risk of the trade. Other methods of judgement tend to produce poor results.
The question of whether you should move a stop, and if so, when you should move it, depends also upon your style of trading, i.e. your tolerance for losses and your profit targets.
Should You Move a Stop Loss to Break Even at All?
There is a good argument for never moving a stop loss to break even. After all, if you test the profitability of a good trading strategy with clearly defined rules, moving stops will rarely make a great deal of difference to the overall profitability. If you treat the question of when to move a stop as art rather than science, you need to be a very good trader to get good results with it. Most new traders are probably better off avoiding moving stops at all, except for example where a trade is, say, already three-quarters of the way to its profit target.
If you have entered a trade and it has moved in your favor, all is going well. Remember that when you move your stop loss to break even, you are potentially limiting the upside as well as limiting risk. In fact, moving a stop is, in a very real sense, statistically the same as taking a profit. Why take profit early if you have faith in your trade entry? All you are doing is inviting the regular and normal volatility of the market to remove you from your position, and if you don’t have a position, how are you going to make any money?
