Stop Loss Strategy - How To Find The Right Fit
By Ultimate Trading
Every Trader Must Learn About Stop Loss Strategy
While most traders understand that it is important to apply
strategy to all their positions, they often dont know where to
set them. How close should stop loss strategy be to price of the
position they are entering? Should they be tight - set quite close
to the price, or a little looser? And what about trailing stop loss
strategy? Here are some factors to consider that will help you
decide about your stop loss strategy. Not every one of these applies
to every trade, but the ones that do will give you some useful
Perhaps the most important factor that affects stop loss strategy is
the question of how much you're willing to lose on a single trade.
My rule of thumb is that you should never lose more than 2% of your
trading capital on any one trade. Yet this can be tempered by other
stop loss strategy considerations, such as how much money you have
in the position. If you have a large amount of money in a position,
2% may be much more than you're willing to lose.
If so, you should set stop loss strategy accordingly. However, if
your account is small and you're not well diversified, a 2% stop may
be so tight that you stop out of the position almost immediately. If
this is the case, you should think seriously about whether you have
enough money to trade.
Another stop loss strategy to take into account is how risky you
believe the trade to be. If you think the trade is a sure winner and
market conditions are favourable, you may give the position more
room to move. But if you think it's got only a fair chance of
working out, or if the position has serious potential to drop, set a
tight stop loss strategy. Also consider how volatile the position
is. If the position routinely moves up and down in a range of 15% or
more over the course of the day, you can't set tight stop loss
strategy. If you do, you'll be taken out by the positions normal
volatility. If the position is choppy but too risky to trade without
tight stop loss strategy, maybe you'd better look for a better
position to trade.
If you have reason to be confident that the position will move
upward even if it swings around a bit first, it doesn't make sense
to set a tight stop loss strategy because you'll just stop out as it
swings. However, if you think it might possibly move up but will
definitely drop if it slips below a certain price, then tight stop
loss strategy is a must.
There are also a couple of basic questions to ask yourself about the
position to help you decide where to place stop loss strategy.
First, is the position cheap? When a position is inexpensive, even
the smallest decimal price movement will be fairly large in
percentage terms. This means tight stop loss strategy may be knocked
out more easily. It also means that if your broker has a rule that
you can't set stop loss strategy closer than .25 below the current
bid, you may not be able to set tight stop loss strategy until the
price moves up. And second, what is the time frame for the trade? On
a quick day trade, tight stop loss strategy is a good idea. On a
position you expect to hold for a week or two for a trend play,
tight stops may or may not be a good idea depending on other factors
that you're aware of.
Market conditions should always be an important part of your
decision. If the market is trending sharply upwards, tight stops may
not be necessary. If you're trying to go long in a bearish market,
tight stops are absolutely necessary. If the market is choppy - if
it has no clear direction or if it's full of nervousness and fear -
use tight stop loss strategy, and ask yourself whether you should be
trading at all that day.
Which of these considerations is the most important? Since no two
trades are the same, different factors will dominate on different
trades. Think about all of them on every trade. If you don't, you'll
miss something important. Setting stop loss strategy is an art.
Youll have to experiment a bit and learn what works for you.
Occasionally you may stop out of a trade too soon and feel
frustrated, but remember this is just like paying for insurance.
Sometimes youll be stopped out, but other times, you will save your
Over time, youll get better at setting
strategy. Eventually, you will be able to have a sense of each
trade, and set the stop loss strategy that work best for you. Then
you will be a nimble and successful trader who can trade with any
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Stop Loss Strategy