The Third Cardinal Mistake:

This fits right in with a game plan and money management. It is the failure to use stop/loss orders once you enter a market - not mental stops, but real stops that cannot be removed. All too often commodity traders use mental stops because in the past they have been stopped out and then watched the market move in their direction. This does not invalidate the use of stops, it means their stop was in the wrong place - they did not have a good technical stop.

When a stop/loss order that was determined before you entered the market is hit, it means your analysis was wrong, your game plan was wrong. With a mental stop, as soon as the market has gone through your stop price, you no longer act like a rational human being. You are more likely to make mistakes because you are now operating on fear and hope.

How many times have you had a mental stop and instructed your broker to call you when the price goes through it? By the time he could call you, the market had run an extra $500 against you. You invariably decide to hold onto the trade hoping that you can get out on a retracement to your previous stop price. Unfortunately, it never touches that price again and you take a large loss. Or you make the mistake of holding the trade overnight because you hoped it would go higher the next day. But the next day it is lower yet, and by then your loss is so large you can't "afford" to get out - and what should have been a small loss turned into a disaster.

There is an old saying that the first loss is the smallest. It is also the easiest to take, even though it may seem hard at the time.

The only way to overcome this mistake is to have an unbreakable rule (and the discipline to follow it!) that stop/loss orders must be placed each and every time the market is entered. I have found the easiest way to take a loss is to have the stop order waiting before the open or immediately after entering the market. Do your homework when the market is closed, and place your order before the open. Another rule to follow; under no circumstances should an initial protective stop/loss order be changed to increase your risk, only to reduce it.

Next: The Fourth Cardinal Mistake: Taking Small Profits and Letting Your Losses Run

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