STOP… In The Name of Profits

This is my last post as King of PG this month. I have enjoyed my reign…very dramatic! And we love drama!  Thanks for reading.

I wish to thank @lg for the topic of this post.

 

The question is, “how do you know where to set a stop loss?”

In my last post, I mentioned that I have been rotating my positions, taking profits in some and dropping non-movers in others, but I made no mention about losers.  That is because I drop losers without question. I NEVER hold onto a stock that has more than a 10% loss MAXIMUM, even in my long term account.

I discussed how I size my positions. I feel that position sizing is something  that each trader must explore on a personal level. Only you can determine your own risk profile. Deciding where to place a stop loss goes hand in hand with sizing your positions.  It’s all about risk. How much risk are you willing to take on with each trade? A lot of folks are comfortable with a 1% loss of total portfolio per trade; I prefer a smaller risk, but only you can decide. You should be realistic and safe in your choice. You can place a wider stop on a smaller sized position or take a larger position and place a shorter stop as long as it meshes with your risk profile.

The majority of my posts have been about dealing with emotions and keeping them out of our trade decisions. Ask yourself what amount of loss triggers an emotional response. Your stops should be placed ahead of the answer so that you keep your emotions in check.

First of all, every trade you enter has the potential to be a losing trade. You should never enter a trade if you don’t accept ahead of time that it may not work. There is no “sure thing” when it comes to trading. This is extremely important because it will help you to keep from “marrying” a trade. They don’t make very good spouses anyway…fickle.

Once you accept that ANY trade you enter can go the wrong way, you will not feel personally dejected when it does. You will simply drop it and move on.

When determining your stop loss, you will also want to consider how long you wish to hold the trade. You will likely want a shorter stop on a day trade versus a swing trade and you may place a wider stop in a long term investment.  In my opinion, you should never allow any equity trade, long term or otherwise, to garner more than a 10% loss for psychological reasons. I have said many times that staying in a position that has more than 10% in losses only sets you up for more losses. It is NEVER too late to sell a losing position. If it has lost more than 10% since you bought it, chances are, your thesis no longer holds true. Don’t waste any more time on it. Drop it and redirect that capital to a more probable trade.

If  you are trading options, you have a different risk equation altogether, so we won’t go there today.

The best chart set-up has an obvious stop not too far away from your buy point. You should determine how much you expect to get out of a given trade relative to the amount you are willing to risk.  We have all heard the term Risk/Reward. While it is fine to let your trade run up without a specific target, you should only take a trade that you expect to garner more of a return than what you are risking. Depending on my risk profile for a given trade, I may pick a stop that is an obvious base, or I may choose the low of the day or the previous day.  In a break out trade, I will likely choose the break out point as my stop.

I offer as an example a trade I entered on June 17 with @chessNwine in 12631, $ISRG. Chess highlighted this set up in the chat room and we bought it on the break out for $349 and placed the stop below the obvious base of $337. Risk was a little less than 4% and our gain has thus far been over 6% and it is still going. (My position was actually in options and I took a 113% profit on them yesterday, but Chess and other traders in the Pelican room are still riding the momentum.)

Now hind sight is 20/20 and clearly this trade worked. I also offer a couple examples for trades I took today. One is $QTM which I bought when volume came in on this bullish chart. Note there is an obvious base/support level around $3.15. I want to make sure that I place my stop with a little room for dips  as was evident on June 27, and I also want to avoid getting taken out by bots who come around looking for short stops, so in this case, my stop is below $3.10. I paid $3.24 and my target is at least $3.60.  This gives me a risk of a bit less than 5% loss on the trade; I expect a reward over 10% if it goes.

I also picked up $BEE as it broke out of an ascending triangle. I paid $7.05. My stop is under $6.95 because that is where the break out started. This is a very short stop for a swing trade. In most cases, I will not recommend a stop on a swing that is less than 2% as it can be easy to get nickel and dimed to death with stops that are too short. But support level is key and in this case, if $BEE drops below $6.95, the break out will have failed along with my thesis for the trade. I can always revisit it if it breaks out again.

These are the kind of set-ups I buy but there are many different styles of trading. Some traders prefer to buy a stock after the breakout has confirmed its continuation. In this case your stock may have already made a strong move since its breakout and may be further away from that point. Look for an obvious support level whether it is the breakout point or some level above that and size your position smaller for a wider stop, but don’t set it at more than 8%. This will give you leeway to make sure that you don’t take more than that 10% loss I mentioned earlier.

Lastly I will admit that I don’t generally set actual stops, but this is because I sit in front of my screen all day monitoring my trades AND I have the discipline to adamantly drop a position at my “mental” stop loss. This keeps me safe of any bots that may want to take me out.  If you cannot sit in front of your computer and/or if you do not have the discipline to drop a losing trade, it is crucial that you physically set your stops. If I have errands to run or need to leave my post, I set my stops before I leave, but I give them a few cents of extra room to ward off the bots.

Again I wish to thank you refined ladies and gentlemen once more for indulging me. It has been a fun month to be King. Until next time.

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