I got a request to go over stop losses. I would say this should be included in the beginner guide/intermediate guide/advanced guides, but in different sophisticated levels. I am going to go over basic types of stop losses, how to choose them based on your account size , and lastly on your risk tolerance.
Just to highlight, this is one of the most essential skills sets to have as it avoids you blowing up your entire account , going broke, and having to move back home with your parents. This is a key topic to learn and cover if you want to become a successful and profitable long term trader.
So what is a stop loss?
- It is a pre-order trade set with your trading platform/brokerage that specifies a price point in which you wish to sell an underlying position once that price trigger is reached
Why Use A Stop Loss?
- If you are trading multiple positions or are leaving your work station, a stop loss allows you to close out of a position that you aren't watching at a specific loss, mitigating the risk . If you weren't watching the stock and it drastically dropped, you could take a huge loss. This allows you to focus on other trades or step away from your desk worry free
How to Pick your Stop Loss Price Point
- If you are trading properly to your bankroll (no trade more than 3% of your account) , I recommend using a stop loss that goes with the 2 to 1 strategy. For example , if you buy an option , if you plan to make $200 on it, then your stop loss should be a loss of $100, to keep the proper win loss ratio to 2 to 1.
My Favorite type of Stop Loss
Trailing Stops are my favorite type of stop loss, it is a bit more advanced, but it is the best way to capture profit, mitigate risk, and allows you to leave the desk for a while or go on vacation. In this strategy, you pick a price move point in which the underlying asset deviates from the current price point to close the trade. The reason this is better than a fixed price, is that if the stock goes up, the trailing stop will move your close out price towards the upward movement. This means that you can also lock in profit as the stock rises . It is a great strategy to implement in your trading.
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