Stop Losses

[The Optimist]

Where should the stop loss be?

I guess there isn't a definitive answer on this.

Here's my scenario which happened earlier this week. I was short on the FTSE 250 (my first CFD trade) and was 50 points to the good when I set my stop loss to about 5% of the index (35 points). On Monday and Tuesday the index moved up triggering my stop loss at 16:00 on Tuesday. Wednesday it then continued to fall with me at that point out of the market.

I am unable to trade during the day so trading is done at 08:00 each morning.

So was 5% too tight a stop loss? Obviously in this case it was.

Is there a general rule or is it a case of how much do you want to lose in return for the possibility of more gains?

 

[darth trader]

Optomist,

as you say there is no general rule but here's my view.


Try to fix the stop loss before you trade with a view to how much you are prepared to lose (points or percent) and from where the support/resistance areas are likely to be on your chart.

FYI. I got stopped out of a good trade yesterday (long on DOW) when I bottled out. It's easier said than done...

good luck.

 

[titus-uk]

When I think of stop losses.....

I always think of Uncle!!! And that is no exaggeration!

There will be times you get stopped out of trades -it has happened to me only recently. However, changing your stop loss as the price slips is a recipe for disaster. It's about managing risk - and part of that is minimising losses.

For me, my motto has become remember baltimore.
Not so many months ago I bought when they just dropped under £2. That was the lowest they had been for a long time. Then they fell - and bounced a little the same day - so I held. Then they dropped a bit more - I eventually sold at £1. That hurt.

However, if I hadn't seen the light then - where woul;d I be now?

Remember baltimore - a hard lesson from me - please learn from it - then it will not be all in vain.

Good luck,

Mark

 

[Terry]

My preferred stop loss is 7.5 % (10% Max if I decide to second guess first stop Loss

What is important to realise is that when you loose 50% of your money, You need to make a 100% profit to get back to where you started. Everybody should agree this it is more difficult to make 100% than it is to loose 50%

Using this model 10% seems to be a good strategy to use although you must also remember that even if you are using a trailing stop loss, you will need to make more than 10% profit and then wait for this share to fall back 10% before your stop loss is hit and then you still would not have any profit. To get a 10% Profit, the share would therefore have to move up 20% and then fall back 10% to your trailing stop. For this reason I would suggest to not Ignore stops but instead look to take profit at support and resistance levels or with predetermined trendlines.

Some people say stop-loss strategies are things that all Brokers love. This is why brokers normally only advise people what to buy and hardly ever what to sell. They know people will automatically get out of trades at some point. The stop-loss system gets people out of positions sooner and people that trade will normally re-open positions when this happens. Therefore the tighter your stop- the more money your broker makes.

Another thing to consider is the volatility of the share. If a share is very volatile it might in fact drop through a 7% stop loss on a regular basis. Therefore it would make sense to look at the volatility of the share before determining what stop-loss you will be using.

Regards
Terry

 

[darth trader]

Terry,

you are correct that with volatile shares 10% may be just a single days movement. In that case I think that it makes the choice of entry point and the position of the stop loss more critical than usual.

It's also harder to use closing prices as the basis for trading.

Effectively, the price you pay for high volatility and potential gains is greater risk.

Different people have their own views on this.