Do you really want to go for a break-even?

Let’s address the concept of using a break-even stop loss level. By definition, it is a safety measure against possible losses. However, it easily becomes a meaningless practice considering the following ideas.

#1 – A safety measure means protection from an unknown event. In the context of trading, it means the trader has no clue regarding what current price movements represent.

#2 – Applying safety measures is subject to timing. If a trader is well into profit and then applies a stop loss level as BE, then, with reference to #1, the trader would be better off by securing at least some of the profits, if not all. BE equals praying for more profit in this case.

#3 – Price levels can get hit over and over again. Levels can be associated with topping formations and reversals, however, the predictability of their type is largely impossible (V,W,H&S, etc + there playout over various durations). If price leaves a topping formation and one takes it as confirmation for entry, then it is very likely that price will keep revisiting the entry level.

A trader may trade in the direction of an imagined trend but a good entry level is always associated with a reversal – either recognized for what it is or not. A continuation is a reversal into an imagined trend, at least that is what it should be. The point here is that price keeps backtracking to areas of topping formations and it is very likely that the entry level will be revisited in nearly all market conditions.

#4 – Break-even is not a level. I mean it does not represent anything technically so it has no validity in terms of price movements. It has more to do with traders’ fear of price movements that are not well understood. Fear of the unknown. One might say, it is about trader psychology but I am not into that idea, rather say that it is about traders’ ignorance. Price does not respect levels and what it does is playing around certain levels (see #3) throwing in a certain type of topping formation. That fact makes the application of break even stop levels impossible. If it looks possible, then one should go back and understand #2.

#5 – When a trader enters a trade, there has to be a target and an understanding of the likely paths price can take while heading with intent to its destination. If the entire process and its elements are not understood, then trading becomes a probability game. May work for some individuals but for most, that path is full of negative energies. When a BE level is hit, it causes a feeling of great uncertainty because its application originates from uncertainties.

#6 – BE could be set after an initial SL level that represents a loss. However, if price goes into negative before moving into positive, then it means the original prediction and entry point was not ideal and in the meantime new information was added to price movements that may require re-thinking of the entire strategy. Considering new information, ask yourself why would BE be the best strategy to apply instead of cancelling the trade and forming a new strategy?

I never use BE in my trade management approach. BE strategies mean fear of what price movements represent and present to the individual. I educate people to understand what price movements represent so the fear goes away automatically.