Thread by @imnishantarora, Let's talk about an important #trading perspective.You must have heard many times [...]

Let's talk about an important #trading perspective.

You must have heard many times that if the stoploss hits, reverse the trade as the stoploss getting hit means that you were wrong on the direction.

I think it is pure illogical if not utterly stupid.

Let me approach the whole thing in a logical manner.

Let's say you got long on something at 100 and put a stoploss of 98. Now, price breaches 98 and your stoploss is hit. But why should it warrant going short? It may but it may not as well.

See, the whole thing is revolving around SL that if it hits then reverse. But SL breach can be random too. A stoploss in itself may be placed at a random level. So how does it breaking matter that much?

So, when one says that if stop gets hit, reverse the trade, it means that he/she is giving over importance to his stop.

Remember, the market doesn't care about your stoploss. It can very well hit it and come back.

There are always two aspects to trading, analysis and timing. Sometimes, the analysis part is right but due to timing being off, the stop gets hit and then price moves back in your direction. In that scenario, it will be fatal if you'd reverse the trade. You'd get hit again.

In fact, I tell all my students to keep watching and observing, even after the stop is hit. If price gives enough evidence that it was just the timing issue and not analysis issue, you can get back in. There is just no shame there.

Even great traders like Michael Marcus or Paul Tudor Jones used to probe the scrip many times before getting it right. Stoploss getting hit doesn't necessarily mean that your analysis is wrong. Sometimes, it just means that your timing is off.

Sometimes, lower timeframes get volatile before aligning with the larger picture. So, if a stop gets hit and still the picture looks good, wait for more evidences.

Coming onto the second part, it can very well be the case that once your stop gets hit, the stock gains momentum on the reverse side and you'd make money there by reversing the trade but let's understand the dynamics here.

They keyword to note here is THESIS not STOPLOSS. Once your stop gets hit, see if the thesis of the chart has changed towards the other direction. If yes, then take the reverse trade as a FRESH TRADE not reverse for the sake. This FRESH TRADE MINDSET is very important.

Even if you re-take the trade in the same direction after the stop hit, that too has to be looked at as a fresh trade.

So, once one acquires that mindset, one doesn't make stoploss point as the AXIS of trading. Once it gets hit, re-assess the chart as if you are looking at it for the first time. If you'd approach it as the chart where your stop got hit, many biases will take hold of your mind.

So, sometimes it may be the case that let's say you got long and your stop got hit, you reassess and still find it a long side analysis. Then wait for some more evidences and re-enter with a fresh mind.

Sometimes, it may be the case that your stop got hit in the long trade, you reassess and find that it's a long at all. But wait, that doesn't mean that it's a short either. It can very well be in the non-trading zone and you made a mistake entering it in the first place.

Sometimes, it may happen that when you reassess, you realize that thesis has changed and the thesis is actually of a short, then go ahead with a fresh mind.

So, two takeaways from this post:

1. When it comes to the direction analysis, SL is not the axis of trading, thesis is. Don't take a trading decision just because SL is hit.

2. Fresh mind perspective. Every trade is a new trade, even if it is in the same direction of your earlier trade before your stop got hit.

Best Wishes !!!

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