The Use of Protective Stops
I cannot emphasise enough the importance of using stop losses in your trading. Market movement in your predicted direction can and will go wrong when least expected, this is where a protective stop or as is known in the trading circles "stop loss" comes in.
Placing a stop is an art in itself and many traders consider this to be a personal thing, though many trading manuals dictate the maximum that you should be prepared to loose from your trading account, this however is not a precise science, there must be some flexibility combined with a common sense approach.
The reason for this is that your analysis could be 100% spot on, but if the stop placed is too tight you will be taken out of the market prematurely, leaving you in the side lines, while the market and price takes off in your predicted direction without you on board.
This however does not mean that you must place a stop so far out that your trading account gets very badly dented. If you think this might be the case, then good advise would dictate that you let the trade pass, there will always be another.
The trick is to find a "trade off" when setting the stop loss, if the trade goes sour, then you should only loose a small amount, too tight or too close could result in your position getting liquidated by a price swing.
Stop losses can not be made rigid as different markets and instruments traded can and do vary in their volatility, the more volatile the price movement the more flexible must be the stop loss placement.
Once a stop is placed it must not be moved to accommodate a loosing trade, a stop must only be moved or trailed to lock in profits.
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