Stop Loss Placement, Part 1

It is the most common question I’m asked: “How do you determine where to place a stop loss order?”

And it’s a great question. Newer traders need to know it. Experienced traders will often study it and refine it. It’s arguably as important as any other aspect of a trade.

So here I am setting out to create this mini-series as a resource. There will be several parts, so check back often for the segments to come.

There are several aspects to stops which I feel should be addressed, so I’m going to cover them in pieces. Small, bite-sized, easy-to-digest pieces.

Hopefully they’ll be helpful to your trading approach and enable you to specify some ways to protect the downside. After all, a stop loss can be your safety net.

Timeframes & Personalities

Deciding on the placement of an initial stop loss will boil down to a few things, not the least of which are (1) your trading timeframe, and (2) the personality of the stock being traded.

I’ll elaborate on each of these in the video, but essentially they’re my starting point:

Longer timeframes necessitate wider stops, and shortened trading timeframes warrant tighter stops.

Similarly, a lively stock deserves a wider stop, while a stock which tends to move very methodically will justify a tighter stop.

Watch this clip and let me explain more thoroughly, along with some examples. It is also posted over at the Trading Videos site, but I’ve embedded it here for your convenience. And if you have questions pertaining to stops, add them to the comments section or contact me directly and I’ll try to work those into the next few segments.

Let me highly suggest clicking the “HD” on the video player and then going full-screen for best quality.

Update: Check out Part 2, Part 3 and Part 4 of this series!

Thanks for stopping by and I’ll see you here soon with more. Until then…

Trade Like a Bandit!

Jeff White

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http://www.thestockbandit.net/about-jeff-white/ TheStockBandit

J.K.,

Thanks for watching and for your email.

The TROW chart as a day trade would receive the 1-2% stop treatment, as it’s a bit of a slower mover and that’d be plenty of room. As a swing, I’d exit upon pattern failure, which in the case of TROW would occur with a break below the uptrend line, so that’s where I’d place a stop.

AGU has not been making the 8-10% intraday moves I mentioned in the video to warrant a 3% stop, so it would again fall at the lower end of 1-2% as being plenty wide of a stop in my opinion. So you’re correct, I wouldn’t give that one a $1.32 stop on a day trade with a $44 entry, it would be more like .65 most likely (1.5%) just based upon how far it tends to move in a given day.

Again, the key for me is risk:reward. If a stock isn’t likely to make a giant intraday move, then it warrants a tighter stop.

Hope this helps and thanks for your question!

Jeff
http://www.thestockbandit.net/2009/07/31/stop-loss-placement-part-2/ Stop Loss Placement, Part 2 | TheStockBandit.net

[...] we dive deeper into this series on stop loss placement, I want to be sure you caught Part 1 because it helps lay the groundwork for this ongoing [...]
http://www.thestockbandit.net/2009/08/05/stop-loss-placement-part-3/ Stop Loss Placement, Part 3 | TheStockBandit.net

[...] continue the series on stop loss placement, it’s time that we build on both Part 1 and Part 2 by taking things a step [...]
http://www.thestockbandit.net/2009/08/06/stop-loss-placement-part-4/ Stop Loss Placement, Part 4 | TheStockBandit.net

[...] series on stop loss placement, we’re going to discuss trailing stops. But be sure to catch Part 1, Part 2 and Part 3 [...]