Stops are one of the most important elements of a successful trade. These three stock loss strategies can help protect your capital and lock in trading profits. These techniques can be used for stocks, futures, ETF, and forex trades.
The important thing is that you do use a real stop in the marketplace and not just have a mental stop in mind.
If the market is cooperating, your stop will not be hit. If the market is bad or changes direction, then you’ll want to be out of it anyway.
Here are the most common stop loss strategies.
Dollar Stop
Maybe the simplest type of stop, you are risking a predetermined dollar amount for a single trade. Let’s say you want to risk $500 on a grain trade or $750 on a stock trade. You would simply figure from your fill price where to put your stop. This type of stop does not follow the price action of the marketplace, but rather creates an exit point from the predetermined value set by the trader.
Pros: Easy to implement and use.
Cons: You could be quickly stopped out in a volatile market.
Percentage Stop
A percentage stop is a very simple way for you to place a stop on a position.
Similar to a dollar stop, this type of stop is also a very simple way for you to place a stop on a position. Rather than setting a predetermined dollar amount, the trader specifies a percentage they are willing to risk for a single trade. Let’s say your trading account is $100,000 and you only want to risk 1% on any one trade. You simply take a $1,000 risk, which represents 1% of your total account. This can help enormously in preventing BIG LOSSES. However, like the dollar stop, this type of stop does not follow the price action of the marketplace, but rather creates an exit point from the predetermined percentage set by the trader.
Pros: Easy to implement and use.
Cons: It’s possible to place stops too close and get your exit filled with a small correction.
Chart Stop
A chart stop is based on the price action of the marketplace. By observing price action, you will notice times when prices can’t seem to break beyond certain levels. You can then use these support and resistance levels to place a stop that is either above or below those crucial chart levels. Setting stops beyond these levels can help protect your account as more traders get in on the break and push your position against you. This type of stop is not as effective in a thinly traded market, but more appropriate for a highly liquid and active market.
Pros: Very easy to implement and use.
Cons: You should not use this stock for thinly traded or illiquid markets.
The Importance of Stops Loss Strategies
Some traders may question the importance of stops and be concerned about putting a stop in the market, only to be quickly stopped out for a loss. Nothing could be further from the truth! Stops allow traders to protect and grow their capital. You can use the different types of stops to your advantage, and tailor them to your strategy and the type of market you are trading. Let stops work for you! They only risk what you decide is worth it.
