In whatever trade market you are on, your trading system should always contain rules or initiatives that would prevent you from further losing money, should the market is not working in your favor. One of these is a proper trade exit. This is part of risk management that you should take seriously or else you will continue to lose within your market.
Probably you have already set your system on how to spot a good trading opportunity and you have already set your maximum loss. What this means is you should know when it is time to exit a market when you are already losing some money. Because sometimes while you expect to lose money but also expect for the market to turn and finally become productive for you, sometimes the loss has started to gain too much that it should be reasonable to know when to stop the loss.
These exits are actually referred to as stops in trading lingo. And there are to types of these stops. The first one is the initial stop and then there is the trailing stop.
To define the first kind of stop, an initial stop is the point wherein you will exit a trade because you know that if you continue you will just also continue to loss in that market. If you want to have a different take at it, it also involves some humility on your part. Because you are admitting that you are on the losing end on that trade or market and that it is time to jump ship. This is why stops are necessary for your trade exit strategy.
The next kind of stop is called the trailing stop. Even the Nicolas Darvas system makes use of such a stop. It really has no major difference to an initial stop, only that you do not immediately end your trading even if everything seems to be on a downward turn. You calculate your stop on the highest price point on the moment that you entered a trade. And since the market changes or moves, that price point also moves. So your stop would depend on where is that highest price point currently located. This helps you in making the most out of the trade.
What makes the trailing stop a bit more confusing or harder to manage and define is that you need to find that balance between the point that you are still expecting to get some profits and up when you really need to exit the trade. Otherwise it may already be too late for you when you finally decide to leave.
On the other hand, the great part with the trailing stop is you can take advantage of the trend for as long as it is in your favor. This way you are actually minimizing your losses, even if you are just taking in very little profits because of the way the market is trending.
Every stock trading strategies would definitely teach you the importance of having these stops set early on. Before you even become active in a market or a trade, you must already predefined your stops so you can avoid losing too much from your activities. Otherwise when it is actually time to leave a market, you have no real idea on when is the best time to do so.
Just keep in mind that having a trade exit is a necessity for every trader, even for a legend like Nicolas Darvas. You should also understand that it is normal to every now and then for you to experience some losses. What sets good traders from bad traders is the capability to know when it is time to pull the stops.