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"Crucial but often overlooked, money management practices can mean the difference between winning and losing in the market.-Placing Stop Order- It’s helpful to think of these by their more formal name, stop-loss orders, because that is what they are designed to do – stop the loss of money. Stop orders are offsetting orders placed away from the market to liquidate losing positions before they become unsustainable.
Placing stop orders is more of an art than a science, but adhering to money management rules can optimize their effectiveness. Stops can be placed using a number of different approaches; by determining the exact dollar amount a trader wishes to risk on a single trade; as a percentage of total equity; or by applying technical indicators..."
Revisit the Trader's Toolbox Post: "Money Management Part 3 of 4" here.
stop orders for entry (initiating a trade) are the best way to avoid false signals eg a buy stop for entry should be placed just above a previous candles high instead of buying at market
it will save u from false rsi stochasitic and macd signals
Hemang,
Thanks for your feedback. That is good advice.
All the best,
Adam
I too have been whipsawed out more times than not using stops. Too tight of a stop can work against you as the market swings and sometimes I think the professional traders are more than willing to drive the market down just to gobble up your stop then back up the stock goes. I now use "soft stops" early on in a trade which is simply an e-mail alert. This allows me to review the position and make my own decision. Once the trade goes in my favor I will set a ratcheting hard stop at 2 to 4 times the average true range (ATR), IE; STOCK PRICE-(2*ATR). You could also use a 10% to 20% stop. Hope this helps.
This is good for theory but in the cases I have tried, the following always happened: the price went down to exactly my stop-loss and after that shot up to much higher levels. So, I think, there must be people out there who can see my stop-loss positions, manipulate the price as to go there and then reverse their positions. Result: I don't put in stop-losses any more and that seems to work better. I guess the one that plays poker also doesn't show his cards to every one.
I have lost my money on stop-losses points. As chris said, after the stop station the stocks in most cases went higher. Some days thereafter it usually seemed to me too late to take new positions. Consequences:in 2009
some markets went 100% my portfolio down 30%.
Chris,
To add to that there was a trade only a couple of days ago I did,
the spread never went near my S/L price and I got closed out.
I am glad now as the stock droped even more!!!!
I understand the stops for stocks, but I haven't figured out how/where to put stops on options? Any suggestions?
Jo,
When in doubt it's best to consult your broker. They will be able to explain how to use stops based on the specifics of your account setup.
Best,
Lindsay Thompson
Director of New Business Development
INO.com & MarketClub