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Make More Money With A Good Stop Loss
By plrprousers | July 11, 2009
Figuring out the proper stop loss when day trading, whether experienced or novice, is always a tricky subject. One thing is for sure, if you don't use a stop loss and try to become a trader, there is almost a 100% chance you will lose a significant amount of money, if not all of it. Even the prudent use of stops, if they are placed in the wrong area, will result in consistent losses no matter how good the stock idea is. Additionally, adding to positions in front of economic data to be released or other unpredictable events can assure higher odds of getting stopped out because of increased volatility post release.
The main thing to keep in mind is CURRENT MARKET CONDITIONS - I cannot stress this enough. Not what the Dow Jones Average is doing, it is what many stocks are doing overall and how they are trading. What is the volatility level - are they slow and steady or whipping up and down on the slightest market move? This makes a large difference in not only the stop placement, but in the overall risk level for the trade. Most people assess risk by the amount one can lose when day trading or swing trading. What almost everyone fails to consider is the odds of that loss happening.
While there is no sure fire way to figure out odds, if you watch what other stocks are trading like you can get a pretty good idea. If current conditions are calm, you can usually use a smaller stop amount and still have decent oddsit will not get hit. When conditions are frantic, a smaller stop is almost assured to get hit - meaning the 30c stop has a 98% chance of getting hit even on the exact same name.
The way you figure the odds in a stop happening when day trading is somewhat straightforward. Look at the average range high to low over the last 20 minutes. Do not pick the most calm period of time, as this tends to not stay constant. If current times are super calm, go back on the chart to a more volitile period for the day (or another day) and then figure the range. It does not need to be an exact amount, we are just looking for an approximation. Once you have measured this range, this becomes your maximum risk.
What the best thing to do is to try to lower the max amount to a much lower level. This can be accomplished in 2 different ways. The first way is to watch the pattern of trading behavior on the chart of the day traded stock - when it reaches a prior high level, does it push thru and run some, or does it bearly touch, then retrace (sell) down? If it tends to push (last few times it reached a high turn point), then its ok to buy the stock on strength. If it tends to fade or try to sell, better off to see it push, then put your order 1/4 of the range you computed earlier, lower than the high its at now. So if the price range figured was 1.00, and the current price is at around 40 now, you would look to place your order at 39.75 to put on a long. You will most likely miss some trades doing it this way, but have to ignore the urge to chase the prices. If a similar pattern is occurring on a lot of other stocks (in general) you have to be extra careful.
A second way to remove some of the risk is to split your entry order into 2 different parts. So if you want to buy 500 shares, only buy 200 now. Wait until the price moves up a decent amount, including past the point where normally they would fade a breakout, and then look to add the remainder on a small dip of 5-15 cents or so. Move your stop up .45 now (figuring you have a 1.00 stop to start) on all of it. The other alternative, if the market tends to fade the push moves, is to buy 200 shares now, then put the balance of your order .25 above your stop price level (figuring it is 1.00). The max stop remains the same on all shares. The difference here is if market conditions get poor for going long when day trading for a period of time, you are going to lose a lot more averaging when its selling because you will get filled on the add, then stopout 2 minutes later on all of it.
The way around this is to simply cut back size - when the market gets unpredictable, play ONLY 1/2 normal size or less until it starts to act more predictably. The name of the game to being more profitable is to preserve capital with stops, and secondly to place the stops in the right way to avoid making a loss too easy for the market to hit. While is is very difficult to actually tell that trading conditions are improving without actually trading, it is a very good idea to trade with less shares until you visibly see conditions look better over time.
Tags:Day Trading,Day Trading Robot,daytrading,investing,learn to trade,stock market,Stock Trading,stocks,trading,trading help,trading rules
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