TRADACITY

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The goal of placing stop losses is to reduce risk by staying in good trades, but trading with small stops to avoid large losses. Usage of stop-loss orders is normally critical to trading success. It is always critically important to place a stop-loss order on each trade you make. That way bad signals and losing trades will not likely wipe out your trading capital, giving you some protection.

Where to place the stop loss? Here are some suggested methods to calculate the level at which you should place your stop loss:

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Percentage Stop Loss

Place a stop at a pre-determined percentage of the true daily trading range. For example, if the true daily range or average of recent true ranges (High minus Low, plus any gap between prior close and today’s low or high) is say 83 points, then the stop may be set at perhaps 120% of that range or about 100 points.

 

Swing-Low Stop Loss

Another method is placing a stop-loss just under the last swing-low or pivot-low. A swing-low is a low point with higher prices on each side. For example, if last swing-low was at 7650 and price moves up for a few days to say 7750, then triggers a buy signal, stop may be placed just under the low price of the low day, perhaps at 7649.

That represents a risk of over 100 points. Of course, the reverse is applicable on a sell, with the stop being just above swing-high.

 

Moving Average Stop Loss

Use a moving average penetration as a stop, i.e., place a stop on a long trade at just under a simple moving average, perhaps a fifteen minute average.

Stop Loss Based On Day’s High-Low Price

Still another approach is to place a stop under day’s lowest price for buy orders. For sell orders it is place above day’s highest price.

 

Money Stop

Another simple approach is known as a “money stop.” It involves setting a stop based on either the maximum money you can afford to lose, or stop based on a reasonable sounding number of points or dollars.
For example, you may not want to lose more than $1,000.00 on a particular trade, so you set your stop at a price equaling $1,000.00 loss potential.