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Stop Loss

Stop Loss Stop Loss

One of the most powerful tools available to traders or investors in the stock market is the STOP LOSS. Most short term traders use a stop loss to protect their position from change of an existing position in market direction. When a trade is entered at a price point e.g. $10.50 long - it is advisable for that trader to place a stop loss at a safe price under the initial entry price. There are two important things to consider here, the first being the potential risk reward ratio for the trade. The second thing to take into account is a safe distance to be certain that the trade won’t record a temporary pullback, taking a trader out of the position, too soon.

There is however another way to manage your risk with a stop loss position, what if we started to manage our profits and more importantly lock in our profits as price moves in the direction of the trade. For some this may seem like a daunting task and they may ask when do I move my stop, how do I know where to put it? These are both very relevant and quite crucial points in your trade management. Although this is where the true profits are made and it is what separates the continually successful traders from the ones who are still struggling to consistently profit with their trading.

You see, the traders who don't effectively manage their positions by utilizing a trailing stop loss will struggle over the long term with success, due to never being able to maximize their profits on their winning trades.

In order to effectively manage your position you first need a strategy just like you had one too enter the initial trade, you need one to manage it and ultimately exit the trade. To develop your strategy you first need to take a step back and have a look at how price reacts to certain indicators in both upward and downward trends. You are looking to utilize an indicator that when plotted on the chart the current price will not come near it until the direction of the trend changes. You can then comfortably create a trailing stop loss position under the plotted indicator which will keep you on the trade for as long as it is moving in the direction of the initial trade. When price moves through the indicator your trailing stop loss position will be activated exiting you from a potentially profitable trade and identifying possible options to in turn, trade in the opposite direction.

In regards to how often one would move their trailing stop loss would be dependent on a number of factors including traders time availability as well as time period of charts; being that you would want to adjust stop loss position more frequently on smaller time frame charts than larger. It is also a popular strategy to have your trailing stop loss automated, though we would still recommend monitoring progress for performance and peace of mind.


December 2013


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