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If I told you that the stop you place in the market is needed so the bigger fish can trade, how would you feel? Would you believe it? One of the first things we are told about trading is that without having a stop in the market, you are one trade away from a blown account.
Our protective stop is vital to managing our risk and to trade without one is potentially account suicide. I don’t think there is much doubt in that statement. Stops are a unique order type in that they are act as limit orders sitting waiting to be filled at a set price yet are executed as market orders. Market orders, being filled at the best available price, are prone to slippage especially in thin markets and those that are extremely volatile. Once triggered, stops have an important function as they add liquidity to the market and at the same time uses the liquidity present in the market. How is this important?
Depending on how you trade, knowing this information is crucial to:
Preventing slippage that can give you an unacceptable average price
Get the average retail trader on the same side of the big fish
Allowing you to trade for some quick profits
Allow novice traders to “pay you
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