Exit Type #1: The Initial Stop

Three Types of Exits
In WAI, new traders are taught 3 types of exits.  Conceptually, this can be thought of as follows:
Type #1. The Initial Stop - when "stock price hits stop loss price"
Type #2. The Raised/Trailing Stop - when "stock price reverses into downtrend"
Type #3. Profit Take Exits - when "stock price hit profit target".
This article considers the first type, which is the Initial Stop, and elaborate more beyond what is taught in WAI.

The Edge of knowing the Initial Stop - RRR Assessment
As Traders, our primary job is to design trades with positive expectancy.  This means we want to look for trades where RRR is at least 3 times.   We may compromise and accept trades where RRR > 2 times, but ideally, we want higher RRR, especially if the win rate is only 50%.   The higher RRR trades generally has lower risks and higher expected returns.

Therefore, the professional Trader always know his Stops first, before he enters the trade.  This then allows him to assess the Risk portion of the RRR assessment, to decide if he wants to proceed with the trade or not.   If he doesn't do this, he just threw away an Edge he has over the majority of the market participants.   When he doesn't do this, the Trader behaves no differently than the amateur who gambles without knowing the odds nor the payoffs.  The professional Trader (and the professional Gambler) both knows the payoffs AND the odds, before they put on the trade.

The Edge of knowing "1R"
On the charts, your 1R = f (Entry Price - Stop Loss Price).
Van Tharp defines 1R = the amount (in $$$ terms) that you are willing to risk on a trade, if you are stopped out.   Therefore, for the Stock Trader, 1R = number of shares x (Entry Price - Stop Loss Price) which is usually defined as 1%-3% capital. (plus commissions & fees).
The professional trader knows that this is his Edge.  When he decides how much he is willing to lose in advance, he becomes calmer and rational, increasing his odds of Trading his Plan.  Through practice and experience, when he found that he becomes emotional when trading 2% capital, he has a benchmark to fine-tune his future trades, perhaps dropping that down to 1% capital.  This experience and benchmarking is an edge.   His selection of the % capital to risk fits his personality, character, and objectives, and strengthens the odds of winning, itself an edge.  The trader who is rationale, calm and able to control his emotions to trade his Plan has a huge edge in the market place that promotes emotional trading.

Where to place the Initial Stop?
As WAI is targeted for new traders, Adam has kept the materials very simple, but it was never intended to be the final authority, but just a starting point.  There are 3 Initial Stops that he recommends:
1. 3xATR below Entry Price.
2. 1-2 x ATR below Key Support Line / Moving Average
3. Below the Previous Swing Low that bounced off Key Moving Averages.

The size of these 3 stops can differ substantially, depending on which of the 8 different Entry System used and the specific chart.  For example, a Trader using Entry Method #1:  Buy the Dip, may find that Stop #3 is the nearest and tightest, perhaps just 1xATR or less, especially if the entry is combined with Entry Method #8: Special Bounce Strategy.   Whereas Entry Method #3: Buy the Horizontal Breakout will typically find Stop #3 to be the furthest, which sometimes can be many multiples of ATR.  The decision on which of the 3 methods to use must first consider the RRR assessment.   In the WAI course, IMHO, there was not enough practice time to combine the 8 Entry Methods with the 3 types of Initial Stops above to truly appreciate RRR > 2 or 3 times, that the new trader is expected to discover for himself through self-practice and experimentation, before he can gain the insights and discover the nuances of the different type of stops combined with various Entry Methods to understand the impact on RRR.

Additional Considerations on placing the Initial Stop

1. As noted above, The Initial Stop should not be too far, to make the Outlay very small or cause the RRR to become less than 2 times. 

2. The Initial Stop should not be too near, to make the Outlay extremely large.  Whilst tight stops improves RRR, it will also cause a lower win rate, and hence, the win rate should not be extremely low, that the resulting system does not fit the Trader's natural character.  

3. The Initial Stop should not be at obvious places where it can be raided very easily by the Stop raiders, such as round numbers which can act as a magnet to trigger the stop unnecessarily.  "Touching price X" is NOT the same thing as "Closing at price X".

4. The Initial Stop should be put at a place where it would prove your trend assumption wrong.  

Implementing the Initial Stop - maximizing edges
1. New trader consideration.   New traders in the US markets are often advised to place the entire Initial Stop at the same time as the Entry Order is placed.  Some students tout this as "best practice".  This is not only to build good trading habits but necessary, since the new Trader often has a full time job, not able to monitor the US markets, and has not build the sufficient trading experience in different types of market conditions.  For new traders, not hardcoding the stops often creates much larger unnecessary losses, and hence is the New Trader's Edge.   Unnecessary loss here is defined as actual loss that exceeds the Initial Stop Loss.

2. Master trader actual practice are exceptions.  The Master Traders on the other hand very rarely hardcode the entire Initial Stop, as this is their Edge.  Whilst appearing contradictory, what is "best practice" for students are often NOT "best practice" for the Masters.   Conrad for example has admitted more than once that he doesn't always use hard stops, even though he teaches his students to do so.   Leong Wei Ping himself also doesn't always use hard stops.   Even in the US, master traders are known to have their positions still on, when their students got stopped out on the same trade.   The reason Master traders don't hard code their stops in certain trades, is because they are able to utilize the edge of their combined experience, knowledge, discipline and practice.  They know the expected behaviour of the stocks they trade under various different market conditions, they have extremely clear mental stop, and they never question the execution when it is needed, they are able to execute it fairly precisely.   They know when to follow and when to break the rules.   And when they don't know, they too get out or they hardcode the stops.

3. Practicality from many open positions.  The edge of hardcoding is "Know thyself".  For a trader who holds many open positions at one time (e.g. it is quite common for me to hold more than 20 open positions at the peak, as well as zero position at certain times), a hard-coded stop in many situations is practical.  I typically place at least 1 contract on a hard stop, to act as alert.   For my smaller positions, I would hard code larger or the entire line, as they are not particularly material, and I want to spend more of my time focusing on fewer selected stocks.  If the RRR is extremely good, I may place a final "fail safe" stop at lower than 1R with 1 contract at 1R point.  For a few positions, I would hardcode less than 50% position.  All these are not arbitrary decisions, but logical decisions for the unique situations, based on my personal assessment of these situations (which many are invariably wrong).   In short, I employ mental stops in the few cases where I feel there is an edge, but only when I am able to monitor the position.   Even if I don't have the stops on, all of my trades will have considered RRR > 2 times before I enter them.

4. Temporarily High volatility considerations.   New traders are advised to close their trades during expected high volatility environments such as earnings, until they have personally experienced sufficiently wide volatility experience - then they will usually want to close out these trades by themselves.  Whilst "earnings" is most frequent cited, it is not just limited to earnings.   Sometimes, Fed announcements can cause very high implied volatility too, or Fed announcements of coming interest rate increases.   However, as noted in 2. above, Masters frequently violate this rule as it is their Edge - they know when to hold through earnings and when not to.  When they have decided to hold through earnings, they would not use hard-coded stops but mental stops, as the high volatility will more likely cause prices to "touch" stop points but not necessarily stay below the stop loss points by the end of the day / after volatility subsides.   Other situations that could cause temporary high volatility may include certain Opening days, certain Closing days, certain periods where the trading volume is thinner (e.g. long Christmas holidays) and potentially more volatile.   Note that not all these days have the same volatility - if you can't tell the difference, follow the rules taught by Adam

5. Don't trade low/non-liquid or manipulated stocks.  

6. Don't place stops during Extended Hours, where volume is thinner and volatility higher.  The risk of unnecessary stops is much higher during Extended Hours.   As mentioned in point 4. above, even during Day Hours, there are certain times like the Opening Hours that shows higher volatility that on some days, can exceed 1x ATR.

Responding to Stopped Trades
It is natural to feel angry or frustrated when we are stopped out from our Initial trades.   Here, you must be true to yourself and utilize your character edge.  As I don't know you and I am not you, I cannot define for you, your character edge.   You must figure this out for yourself, know yourself, and turn your innate and natural strengths into an Edge.   If you are lucky, you may discover this insight very early after a small number of trades.  If not, it could take years to figure out yourself through thousands of trades.  For me, it is closer to the latter.

For many traders, I believe seeing the Bigger Picture helps to deal with stopped trades.   For example, in the experiment reported here, I made 64 trades over a 2 week period, where there were 31 losses.   I am glad to say that I wasn't overly sad incurring these 31 losses.  If I had only made 1 trade, I know it is easy for me to feel upset when I have a loss.  If I bet too large an amount that exceeded my risk tolerance, I know it is easy for me to feel upset and angry when I have the big loss.   This is because we would incorrectly be looking at the trade as our last trade, which is of course not rational.   We learn trading because we want to be able to trade for the rest of our lives.  If each year we make 250 trades, and we trade for the next 20 years, we can expect to make 5,000 trades in our lifetime.  For many of you who are younger than me, you could expect to make 10,000 or more trades in your lifetime.   What is a single trade loss in that context?   Why experience the emotional roller-coaster, 5,000 times, when our Trade Plan requires us to expect 50% x 10,000 trades = 5,000 losses over our lifetime.  Stopped trades are good trades, because they are part of the necessary losses.  They are part of the broader Plan to make money.   This is where the various sayings come - "we must first give to receive".  "If we don't give, we can't receive".  "When you are ready to lose, you are on your way to winning".   "You cannot win if you haven't yet learnt how to lose".  And so on.

In short, be happy when we are stopped out per our individual Trade Plan.  This is a good and necessary loss.  Ideally, we should give thanks when we are stopped out.  When our losses are kept to 1R, and the win lose ratio is consistent with our broader Objectives and 250 Trade/Year Trading Plan, then, there is no need to feel overly upset, so much so that it adversely affects our future trading goals or spillover into other aspects of our lives.   Of course, if it's much bigger than 1R, or we have losses far beyond any reasonable parameters of our Trading Plan, then, we should take some time off and reevaluate our entire approach.