How to keep stop loss (SL)?
We already know that the importance of using a stop loss order can not be stressed enough. However, here are a few questions for us to think over
- When do I set a stop loss?
- Should I use a soft (mental) stop loss or a hard stop loss?
- Where do I keep stop loss?
- What am I supposed to do if my position flips on a penny?
- When do I keep stop loss?
SL point should be well planned before you enter a trade and placed right after your entry. You should already know where your entry point is before you open a trade. If you are still trading as it goes, you are not ready yet. In other words, you should NOT trade randomly. Every entry, SL, and exit should be well planned in advance.
Should I use a soft (mental) stop loss or a hard stop loss?
All smaller players (less than 1 Million trading capital) should use hard SL provided they trade liquid stocks. The mental SL is for 2 kinds of traders. One is extremely sophisticated traders. This group of people is the killers of all killers. The other is beginning traders who just want some excuses for not using stop losses.
Where do I set a stop loss?
I use 2 strategies.
1: Use a previous support/resistance. As we can see from the picture below. It is a 5-minute chart. You enter a short trade around region 1 and your SL is set around region 2. Region 2 shows some resistance (a former high). Your SL should be a few cents higher than that high. If you enter a long trade around region 4 and your stop loss should be set around 5 since we had a huge support floor one day ago. This support is very solid if you combine 6 and 7. If you entered around 4 and held onto your position, it would be one solid run for a day trader.
2: Use your maximum allowable loss in dollar amount. For example, let’s say you cannot lose more than 300 dollars per position, which is at most 1% of your portfolio. 0.5% is even better. You have 300 shares of XYZ @ 30/share. You would set your stop loss around 29.00. 29 is a good number considering a lot of people are told not to set their stop loss on whole numbers. Think outside of the box.
What am I supposed to do if my position flips on a penny?
Let it be. Any trader would step in at any moment to put in a sell/buy order to trigger your SL. Do not blame yourself for that. It is totally out of your control. You cannot remove your SL, period. If your system is good, it should regenerate an entry signal when the stock reverses to a new high/low. Nevertheless, do you have the willpower to reenter that position in which you just lost $300?
I sometimes prefer the second strategy than the first since I do believe sometimes Market Makers of some small-cap stocks do deliberately take out stop loss orders at key supports. It is pretty hard to do that for large caps such as Reliance, ITC, and HDFC. There are many other different strategies to set SL orders. Other traders, please feel free to share yours with us.