One Way To Place Stops
Protective Stops On Every Trade
Placement of the initial
protective stop is as much of an art as it is a science. Place them too
close and you will almost surely guarantee yourself a loss as the
“noise” of the market alone will stop you out. Placing it further away
increases your chances of a winning trade
should the trend resume, but obviously increases
your risk if it doesn’t.
Stops can be placed on price
pattern, the stock’s volatility, or quite simply, the price of the stock itself.
Tonight we’ll look at priced based protective stops.
Higher priced stocks tend to
move more on a point basis. Therefore, the following table gives you a general
guideline on where a stop could be placed based solely on the price of a
stock. This should help (but certainly not guarantee!) to keep you from being
stopped out prematurely on a winning trade. Keep in
mind that tighter stops can be used on less volatile stocks. Conversely, more
volatile stocks will require looser stops. I’ll dig a little deeper into the
theory and practice of protective stops in future columns.
Looking to the indices, on Monday, the Nasdaq gapped lower
and continued lower. It found its low in early afternoon trading and rallied for
the remainder of the day. This action has it closing well after tagging its
50-day moving average (the red line below).
The S&P put in a similar performance.
So what do we do? The turnaround
after tagging the 50 is, to quote Martha, “A Good Thing.” It suggests
that buyers are willing to step up to the plate at this well-watched average. It
certainly doesn’t give us an all-clear, but it’s a lot better than cutting right
through it like butter. Considering this, look to nibble on the long side but
make sure you wait for continuation higher in the indices, sector confirmation,
and of course, confirmation in the stock price itself (i.e., entries). If you
took any short trades lately, in light of Monday’s intraday turnaround, you
might want to take some profits and cinch up your stops.
No setups tonight.
Best of luck with your trading on Tuesday!
Dave Landry
P.S. Reminder: Protective stops on
every trade!
P.P.S. Learn my best swing
trading strategy in my new interactive CD-ROM. Click
here now for details.