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Know Where To Place A Stop Loss

One of the worst mistakes a trader can make is to not have a stop loss in place on any position they are in. The legendary trader, Jesse Livermore, would use a maximum 10% stop loss on all positions. When he broke this rule it was when he took a big loss in his account. He said that a 10% percent loss never really bothered him as he would make it up on the next trade.


Learning how to survive to trade another day without incurring unsustainable losses is what will lead to you become consistently profitable in the future. The 10% stop loss rule is a good stop loss percentage to stick to, especially if you do not know how to read a chart. If you learn how to read and understand charts then you can have a much smaller stop loss in place. Over the years I have realized that the best place to put a stop loss is below a major pivot or major support level if you are in a long trade. By doing this you can actually have a much tighter stop loss than 10% and this will help every traders P&L (profit and loss).


STOP LOSS TIP: Now here is a simple rule that you should follow. The stop loss should be placed or based on the chart which the trade is keyed off of. For example, if the pivot low support level is on a daily chart, then you must place the stop loss on a daily chart closing basis. In other words, if the stock you are trading closes below the major pivot low on a daily chart close, then you move out at the close of the session or the next trading day. If the pivot low stop loss is on a weekly chart, then you wait for a close below that level on a weekly chart basis. The same rule goes for intra-day trading as well.


Novice traders should practice this first by paper trading. By doing this you take on no risk and can see for yourself how major pivots and major support levels get defended by the institutional money. Remember, it is the institutional market makers that move stocks. When you start out in this business it is so critical to learn all that you can. This is a very humbling business even for the most seasoned traders, so get educated.

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Nick Santiago
Chief Market Strategist
InTheMoneyStocks.com - Since 2007