Stop/Loss Management: Where Should I Place My Stops?

Money management is an essential part of any trade.

If a trade begins to go against you, or even if a trade did exactly as you had hoped, knowing when to get out, is important.  Look at the U.S. dollar for example. Let’s say you bought the currency around 97.30 in November 2016 before it began to run to a high of 103.81 by late 2017.

One way to protect that win is by using a trailing stop loss of 5%, for example. That means that if the currency fell 5% from 103.81, or fell to 98.53, you are automatically stopped out, allowing you to still collect a win from a 97.30 entry. However, if the dollar continued to rally well above 103.81, the trailing stop loss would simply reset higher.

What’s great about at trailing stop is that it removes the emotion from the trade.

The second your stop loss is hit the trade is over. You collect your wins and move on.

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Other times, we can set our stop losses at let’s say 10% less than where we bought the trade in the first place. You’re simply limiting your losses with it. For example, let’s say you bought the dollar at double bottom support around 98.44, hoping for a bottom.

If that support level is broken, and the currency now falls to 88.60, you are stopped out. If that level is never hit, the position stays open. It’s just an essential way to protect yourself and your money along the way. 

Or, we can set our stops just under prior points of support.

For example, the dollar now trades at 95.42. Prior support is 95, dating back to August 2016. Should the currency fall under 95, the next support line is 94.49.  We can set a stop slightly under one of those support lines, depending on your risk tolerance.

Without a stop in place at either level, we also risk the chance the dollar could even fall as low as May 2017 support at 92. 

The best part of any stop loss is that it does remove emotion from the trade.

Far too many of us are guilty of trading on just that.  But as many of us have also learned, it can be a costly error along the way. 

Success is not always a guarantee. 

But if you have a plan in place, you increase your odds significantly.

It’s not about having the “perfect” strategy. It’s about the rule you abide by with each trade. Any one can trade a stock. But it’s takes a disciplined trader to trade that stock well.

One of the biggest issues facing all walks of traders is a severe lack of discipline and structure in stock buying habits. Many fail to use stop losses, or even protect gains with a simple trailing stop loss strategy. Others risk far too much.

Plan ahead and you’re ahead of the game.

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