Stops and trailing stops.
Rules based play
I teach one should set a wanted gain sell for every play entered. One should also have an acceptable loss figure for that play. Knowing what you will win or lose and closing orders at those planed locations is probably one of the main reasons for longevity while trading or investing. Use an OCA "one order closes another order" conditional order structure when first entering a play. It doesn't matter if your playing short, mid, or long term. Or the reasoning for the gain expected/wanted. Choosing the loss amount depends on your risk level, yes.
Acceptable loss (stop) could get very involved because of so many different trading styles, time frames, and risk levels. But have no doubt that the selling of a losing trade factor is just as important as any gain one may receive/expect.
I'll start with how I trade/do it. I swing trade on 2 week time frames, with a low risk level. My plan is basic, simple, and clean. I choose plays based on chart pattern targets and pick a loss amount 1/2 the gain expected. That way I need to have 2 losses for each win, to break even and all three plays lose to lose money, after 1 win is in the bank. All things equal; when I plan under an equal position sizing strategy. Position sizing is another subject, one should learn about for trade planning. My acceptable loss is easy to calculate. For a 10% gain, I set my stop at down 5% from entry.
Non rules based play
Now say I base my play on a gut feeling or fundamentals which project a price level being reached over 3 months. Or any other option for playing. I still have a gain wanted/expected. I'm out of my normal trade style and want to pick a stop price.
Many pro traders use the moving averages support levels for this. Say the 50MA or 100, 200 MAs. Others will involve volatility in the stocks history. The TA indicator ATR can be used for this, or one can just look at a charts history and eye ball price flux to keep from being stopped out to easily by the normal up's and downs for the stock.
So if one is looking for an acceptable loss without a rules based plan. Two main factors should be though about. Where support is and how far average price swings happen at your stock. There are other chart indicators that can be used, including the SAR overlay which many use for stops.
Support is easy, volatility not so much. Here's a TIP: Using the ATR indicators value, double it or 1.5 times it, to place a stop below entry. The ATR indicator changes with price swing changes over time. So during large price flux periods the number will be high and small when daily price flux is tight. I wouldn't change the parameter from 14, if holding under 6 months. But if your investing long you could move it to 30 days.
The indicator number/value is equal to the stocks price hi & low for the day, averaged over the time parameter use. (standard 14 days) So think of it as a price number, not a graph plot number. If your looking at a $10 stock and the ATR is .40. The 14 day average price swing is 40 cents. To keep yourself from being stopped out easily; low risk could be 80 cents (double) for your stop. And say 60 cents (1.5 times) for mid risk or 40 cents (at ATR value) for high risk of getting stopped out.
As for the SAR, just put the stop at the charts dot price below on the chart. SAR can be deceptive as it works best during trending stocks and can fail as a good stop choice if used while times of sideways price channeling.
RECAP: when playing without a rule based plan. IMO First: 1.5 times the ATR TA indicators value is a good choice. Second: support at the 50 MA for swing trades, 100 for position trades and 200 day for over 6 month plays works well. Third: SAR dot location works well in up trending plays.
Now that we have "finding a stop" has been covered, lets get into when the trailing stop may be advantageous over a stop. Ps; I don't recommend using an out right sell stop when trading. Use a stop limit or stop market order. They reside in your brokers computer platform and don't go to the open market for execution, till your restrictions are reached. Keeping the risk of manipulation closing your open market order off the book.
The trailing stop will increase with price automatically. Giving you upside gain, but keeping down side risk in place. So if your play approaches gain target. It's always a good idea to conceder placing a trailing stop on your play for that last possible hurrah. And removing what ever protection was in place up to that point.
You can take advantage of the up trend by removing your OCA gain/loss order and place a trailing stop on. Since you have already gotten the expected gain target, or just about, keeping your trailing stop tight is a good idea. This is where even with a rules based plan the ATR indicator can be employed. I use the most recent ATR value with no multiple.
One can get creative with trailing stops once some gain is established in a play. I often place a trailing stop mid way to target. Keeping the entry price as my stop level. Example; your play is up 10%, place a trailing stop at 10%, so worst case is break even. or 5% trailing stop to protect 5% of the gain gotten. But until some level of gain has been established. I recommend using a solid OCA bracketed trade order. With sell limit for gain and sell stop limit for acceptable loss.
AI
