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Risk
management. The Stop Loss -
One key
to success from a Traders' Toolbox. First, diversify your holdings. Do not let a single stock make up 100% of your entire capitol. Watching a stock fall without cutting your losses can turn a small loss into being wiped out. A new trader will just "hope" for a return to the original investment. The market does not care about your entry point. The investors and traders holding the stock may want different events to occur. We have traders "shorting" the stock, hoping the price will fall. Investors hope the stock will go up. We are finding a good number of our
readers are not professionals and struggle to set stop-losses. From the
large losses inflicted on most pros in the earlier stages of their
careers; the fear of loosing money takes hold. The only way to
discipline a new trader is to provide guidance. Losses will either
break a trader or force a new way of thinking. Fear of loosing money on the
opening bell is and executing a trading plan is better than hope for a steady
rise in the price. When was the last time Indy drivers started the race
without the roll cages, seat belts, and helmets ? A 5% loss is the most you should risk. This is a general rule for quality blue chip stocks. Stocks trading over $20 are more technically predictable for stop-loss points than lower priced stocks. Penny stocks below $1.50, are more like gambling than investing. A new trader/investor will find stocks trading under $1 more appealing. The idea of doubling your money on a low cost entry stock has new traders counting profits before they enter the trade. The truth is Las Vegas also was built on low price slots. Most stop-loss points will not work on low priced stocks with a small number of shares in the float. It only takes a few traders to manipulate the day's trade. When a press release is announced on a junior gold miner, a rise or fall 20% is common.
Example: ABX, Barrick Gold is trading at $51.17. After entering the trade enter the stop-loss order. If the stop drops below 50 you would have changed the stop-loss to a market order. The stop-limit is to protect you on the chance ABX opens at $47. Without the stop-limit of $49.50, you just sold at $47. The range between the stop-loss and the stop-limit should be large enough for a trade to execute. For penny stocks, insiders control the volume and stop-loss rules break down. Avoid penny stocks if possible. |
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 Basic stop-loss and stop-limit. |
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| 5.
Do not
lower the stop-loss for any reason. A
trader's
notebook will help discipline your trading stop-loss. These stops
should
be set
when the market is closed and your emotions are not caught up in the
media
reports. If your stock is trading below your stop loss you need to ask
yourself
why you are still holding the shares. If you would not buy
the stock at
these
prices, sell it and move on. Never marry a stock. 6. Increase your stop-loss as the stock climbs in price. A trailing stop can be found on some trading platforms. The best stop-loss is usually picked by looking for prior chart support/resistance levels. 7. Stops are not the same in all market conditions. The Market risks are changing in the business cycle. The table below is a better approximation to limiting risks than to just go with a 5% stop-loss rule. When you have profits in a long or short position you may just sell and move on. Most pros will trade with no emotions and will not wait for a stop-loss to kick in if the market turns on a dime. A stop-loss will help turn your trades into a mechanical system and free up your time. Avoid watching each of your holdings every 2-3 hours and stick to a stop-loss. |
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| Table 1.2 Stop-loss and Trailing Stop-loss points for all Stock Phases of the markets. | |||||||||||||||||||||
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The Editors, TopStockTraders.com 2007-2009 |