Setting a stop loss is arguably the most important step in any trading strategy, and is interestingly also one of the most neglected. You need to determine and set it as soon as possible after taking your position.
They should be set just below recent levels of support. Levels of support are points at which a downward heading stock reaches a price where more buyers than sellers step up to the plate, sellers dry up and the stock direction turns upwards.
The more significant levels of support form when a stock is heading more sharply downwards, then turns and heads more sharply back upwards.
Like levels of resistance we can have minor levels of support, as happens every day as traders jostle price, to significant levels which are added every few days, to major levels of support which can last months, years or even decades, depending on company growth and longevity.
A stop hiding under a very significant support is less likely to get triggered than one hiding under and not-so significant support. This is because significant levels of support require a lot of selling pressure to get breached, where as minor supports give way easily.
When deciding where it should be placed, what we need to do is take a note of the most recent significant level of support. If we've been watching the stock closely before buying in, then the most recent significant level should not be too far behind us, and not too far below.
The more significant the support the better but if there is non close to your buy point then I would normally stick to a maximum of 7% or 8%, although I have been known to go to 10%, depending on circumstances.
This means of you are using a working fund for each trade of US$10,000, the maximum loss you could ever sustain in any one trade is US$700 to US$1000.
However, your stop loss will usually be tighter than that maximum and with experience tighter still. In most cases bad trades are limited to about US$300 which is a fair risk for gains which average US$2000 for a full trading cycle.
You will get a better feel for where the true breaking point of a stock is (and it varies considerably between different equities and different industries) when you have made a few trades. You'll find you'll hone your skills pretty quickly.
They should be set just below recent levels of support. Levels of support are points at which a downward heading stock reaches a price where more buyers than sellers step up to the plate, sellers dry up and the stock direction turns upwards.
The more significant levels of support form when a stock is heading more sharply downwards, then turns and heads more sharply back upwards.
Like levels of resistance we can have minor levels of support, as happens every day as traders jostle price, to significant levels which are added every few days, to major levels of support which can last months, years or even decades, depending on company growth and longevity.
When deciding where it should be placed, what we need to do is take a note of the most recent significant level of support. If we've been watching the stock closely before buying in, then the most recent significant level should not be too far behind us, and not too far below.
The more significant the support the better but if there is non close to your buy point then I would normally stick to a maximum of 7% or 8%, although I have been known to go to 10%, depending on circumstances.
This means of you are using a working fund for each trade of US$10,000, the maximum loss you could ever sustain in any one trade is US$700 to US$1000.
However, your stop loss will usually be tighter than that maximum and with experience tighter still. In most cases bad trades are limited to about US$300 which is a fair risk for gains which average US$2000 for a full trading cycle.
You will get a better feel for where the true breaking point of a stock is (and it varies considerably between different equities and different industries) when you have made a few trades. You'll find you'll hone your skills pretty quickly.
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