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TRADING #101 COURSE – PART II TWO: SUCCESSFUL TRADING PIE – WWW.TRADERSCOACH.COM

5. One-bar trailing stop. This type of trailing stop is used when prices have
reached your profit target zone or when you have a breakaway market and want
to lock in profits, usually after three to five price bars moving strongly in your
favor.
6. Trend line stop. This stop is set using a trend line placed under the lows in an
uptrend or on top of the highs in a downtrend. You want to get out when prices
close on the other side of the trend line.

Other stops used are generally a form of one of these six stops or a derivative of them.

Setting stops will require judgment by you, the trader. Judgment is based on experience
and the type of trader you are. You will set your stops based on your psychology and
comfort level.
If you find you are getting stopped out too frequently or if you seem to be getting out of
trends too early, then chances are you are trading from a fearful mind-set. Try to let go
of your fear and place stops at reasonable places in the market.

Position your stops in relation to market price activity; don’t pick an arbitrary place to set
your stop. Many traders incorrectly choose a stop so their loss is the same exact dollar
amount each time they are stopped out. By doing this, they are completely disregarding
the meaningful market support and resistance areas where stops should be set.

Your Success Depends on Having a Healthy

Respect for the Risk of Ruin

Risk of ruin (ROR) has been studied by traders from the beginning of time, and is the
mathematical basis for most money management systems. The theory is based on a
formula that will tell you what the chances are that in using a set of trading rules you are
likely to go completely bankrupt and to be ruined.

Ideally, you want to design a money management system that will protect you from ruin
and will give you zero percent likely chance (this is not a guarantee) of going completely
bankrupt.

The ROR mathematical formula is based on three components:

1. Win ratio. Your win ratio represents your percentage of wins and your probability
of winning. For example, if your win ratio is 40 percent, you have 40 percent
winning trades and 60 percent losing trades.
2. Payoff ratio. This is your average winning trade dollar amount divided by your
average losing trade dollar amount (how many dollars you earn compared to
each dollar lost). For example, a payoff ratio of 3 to 1 would mean you earn three
dollars for every dollar you lose.

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