One of the cardinal rules in trading is to always limit your losses so that you can trade another day. No matter how well you think a given security may do you have to protect your downside. That is why they invented stop losses, so that fools like us don't lose all our money at any given time.

My system* has stop losses factored in as well. Just because my indicator may be in a "buy" mode does not mean some worldly event may not occur such as a bank failure, a terrorist attack, an earthquake or any other number of events which then shake the financial markets and they all sink. So, no matter how rosy the stock market may look at any given time, you need to protect yourself from the unexpected.

Stop losses do that. I like to refer to stop losses as either fixed or flexible. A fixed stop loss is a predetermined exit point. The simplest type is based on your risk tolerance. If for example, you are of the mindset that you do not want to lose more than 5% of your investment on a particular trade then you set your stop loss at five percent less than your entry point. In this situation if you bought a stock or ETF at $75.00, your stop loss would be at $71.25. If your investment should drop to $71.25 your position would automatically be sold.

One has to determine what their risk level is. It could be five percent, ten percent, or even a greater percent of your investment. Keep in mind; just because my indicator points to a buy signal, ultimately there is no real guarantee that you are going to make money. The odds may be in your favor but that is all. Refer back to my statistics and you will see we have some losing trades.

DO STOP LOSSES CREATE PROBLEMS?

The problem with fixed stop losses is that in my system* you may hit your stop loss before a sell signal is given. (Obviously the tighter your stop loss the greater the chance of this happening.) I had this problem when I first started trading my system*. If your stop loss is triggered, but the next day the market rises, the last thing you want to do is to repurchase your position. In other words, once you are out, you are out of that trade. The reason for this is simple. You are now making emotional decisions about the direction of the market and once you start doing that, you are doomed to failure. Remember, no one can acurately and consistently predict the movement of the stock market.

For a while I was stumped. What is the perfect stop loss percent? You know what, there is none. I don't know about you but I do not want to lose 20 percent on a trade because I need to keep my stop loss high enough so I do not lose my position while my system* is still in a buy mode. Heck, I could use a broker if I wanted those kinds of losses.

As I have stated previously, I am always looking for an angle and sure enough I kept reading and researching and came up with a solution. Again, I did not invent this concept. I owe this concept to a man named Bill Kraft and his book TRADE YOUR WAY to WEALTH. Published by John Wiley and Sons, Inc.

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*Disclaimer and legal stuff I have only been trading with this system since 2005. The returns shown above were done through back-testing which as the term implies is going back to the year 2000 and seeing how my system* would have performed. The thing to understand here is that many experts consider back-testing to be biased because of the "would I have actually made that particular trade at that particular time mentality". The reason back-testing works in this system* is because there is no emotion involved in the buy or sell decision. The decision is strictly mechanical; you do what the green and purple lines tell you to do.

All contents of the system is presented for information purposes only. This system* is not to be interpreted as investment advice, an endorsement of any security, or personal investment advice. I am not a registered investment advisor, broker, or dealer and this system* is intended as a service for information only. You should also be aware that past performance is no guarantee of future performance. You buy at your own risk.

Should you purchase this system please keep in mind that it is copyrighted and you purchase for your own particular informational purposes. You have no rights implied or otherwise to share or disseminate this information with others.