Master the Art of Stop Loss Placement

[Soultrader]

Understanding where to place your stops is an important skill in trading. Many new traders do not place importance on this and will usually place stops at the most obvious locations. New traders also like to place stops at a fixed amount no matter what the setup. Each setup requires a different risk parameter.

I base my stops according to my entry. Since I am a pivot based trader, alll my stops will be placed above or below the pivot line. However, ff you entry is based on a indicator signal your stop should be based when your indicator proves you wrong. One mistake I see with new traders is that they will place their stop 1-2 S&P points after a buy/sell signal. If you entry was not based on price action, you are not using a smart stop. Price can drop to your stop loss level without your indicators confirming it. This is a sure way to lose.

Tape readers are able to use a tighter stop. This is because they clearly see short-term support/resistance levels on the tape. Most new traders do not understand tape reading. This skill takes months to years to learn. Yet, new traders attempt to scalp placing 30-40 roundtrips a day. This is not the way to learn successful trading.

Trailing stops

Once a trade moves in your favor, it is wise to move stops to protect profits. However, trailing stops by a fixed percentage or points is not the greatest way to manage your position. I use what are called "smart stops". As a trade moves in my favor, my rule for stop placement is automatic. After 10 dow mini points, I move my stop to breakeven. I will also scale out half at +10 and a quarter at +20. The last quarter position is the portion I manage. When price breaks a pivot line, I will move my stop below the pivot. All of my stops are based on price levels. Once price breaks that level, I will move my stop. I also combine fibonacci levels and pivots to find good stop placement levels. This gives room for the trade to work out.

Wins must be greater than losses. Managing a winning position is crucial in trading success.

Good luck and best of trading.

Regards,

James Lee