Decide How Tightly To Set Your Stop Loss Order
By Ultimate Trading
Several Considerations For Setting Your Stop Loss Order
The most important question about setting your stop loss order is how
tightly you should set them - how close to the price where you entered
the position or, for a trailing stop loss order, how close to the current
price. This is a general decision you'll make before you figure out exactly
what price will be your stop trigger. How tightly to set a stop loss order
depends on several factors:
Which of these considerations is 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.
- How much you're willing to lose on a single trade. Our rule is that
you should never lose more than 2 percent of your trading capital on any
- How risky you believe the trade is. If you think the trade is a sure
winner and market conditions are favorable, you may give the position
more room to move down before triggering a stop loss order. 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 order, or don't make the trade
- How volatile the position is. If the position routinely moves up and
down in a range of 15 percent or more over the course of the day, even
when it's not really going anywhere definite, you can't set a tight stop
loss order. If you do, you'll be taken out of the position by the positions
normal volatility. If the position is choppy but too risky to trade without
a tight stop loss order, maybe you'd better look for a better position
- How cheap the position is. When a position is inexpensive, even the
smallest decimal price movement will be fairly large in percentage terms.
This means a tight stop loss order may be knocked out more easily. It
also means that if your broker has a rule that you can't set a stop loss
order closer than .25 below the current bid, you may not be able to set
a tight stop loss order until the price moves up.
- How much money you have in the position. You should consider this in
conjunction with the rule that you should never lose more than 2 percent
of your capital on any one trade. If you have a large amount of money
in a position, 2 percent may be much more than you're willing to lose.
If so, you should set your stop loss order accordingly. If your account
is small and you're not well diversified, a 2 percent stop loss order
may be so tight that you may stop out immediately. If this is the case,
you should think seriously about whether you have enough money to trade.
- Market conditions - If the market is trending sharply upwards, a tight
stop loss order may not be necessary. If you're trying to go long in a
bearish market, a tight stop loss order is absolutely necessary. If the
market is choppy - if it has no clear direction or if it's full of nervousness
and fear - use a tight stop loss order, and ask yourself whether you should
be trading at all that day.
- The time frame for the trade - On a quick day trade, a tight stop loss
order is a good idea. On a position you expect to hold for a week or two
for a trend play, a tight stop loss order may or may not be a good idea
depending on other factors you're aware of.
- 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 order because you'll just stop out as it swings. If you think
it might possibly move up but will definitely drop if it slips below a
certain price, then a tight stop loss order is a must.
Your job is to exercise good trading judgment and figure out what makes
sense for each trade. This is where the "art" of setting a stop loss order
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