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Stop Loss Placement, Part 3

To continue the series on stop loss placement, it’s time that we build on both Part 1 [1] and Part 2 [2] by taking things a step further.

In this segment, I specifically want to clarify a major advantage of basing our stops on the chart. Of course we’ll know where to get out if the pattern happens to fail, but there’s one thing many traders fail to focus on in relation to that. It’s an equation, and a simple one, but it gives us our position size.

Dollar Risk Per Trade

If every stock were the same price and carried with it the same volatility, and if every pattern we traded happened to carry the same exact chart scenarios, Part 3 of this discussion wouldn’t exist.

But each stock is a little different than the next. Each setup will vary from the previous one we entered. And of course, the distance from our entry to stop isn’t going to be the exact same from one trade to the next.

So what we need to do if we want to maintain a consistent dollar risk per trade is to determine an amount we’re willing to lose on each trade in case we are wrong. Let’s face it, some trades aren’t gonna work, and we’re going to get stopped out.

Once we know how much we’ll be willing to risk (in terms of a set $ amount, or a set % of our account value), then we can combine that into a simple equation to give us our position size.

$ Risk Per Trade / Distance from Entry to Stop = Position Size

Watch this clip and let me explain more thoroughly with some specific examples. It was also posted over at the Trading Videos [3] 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 1 [1], Part 2 [2] and Part 4 [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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