Stop Losses are Essential, But do You Apply Them Correctly?
In all of your share trading activity, using a stop loss is vital to help you manage your risk while at the same time it is protecting your trading capital.
It is essential that you know how to apply a stop loss, for if you make it too tight a slight turn in the market will see your stock sold. Whilst on the other side of the coin if the stop loss is too wide you may lose more than is really necessary.
Here is a handy guideline which will help you to set your stop loss at the correct level.
To calculate the stop loss position you need to look at the Daily Price Range of your stock for the last five days.
Here is an example :-
The price range was between.
Day 1. $25.00 and $26.00 = $1.00
Day 2. $26.50 and $27.00 = .50
Day 3. $27.00 and $25.50 = $1.50
Day 4. $25.00 and $27.00 = $2.00
Day 5. $27.00 and $26.00 = $1.00
ADD up the total =$6..00
Divide this total by 5 (Days) =$1.20
So the average daily price range is $1.20.
So you place your stop loss $1.20 from the most recent closing price. Some traders prefer to use a percentage such as 5% of the total capital invested. i.e.$100,000 capital = $5,000 While others prefer a lesser % figure. Really its up to you to decide. There are no hard and fast rules, but it is vital that you use some sort of protection to save your trading capital and your hard won profits from vanishing.
The stop loss does just that.
I wish you profitable trading.