Meeting your trading goals is often as easy as managing your trading risk. The use of different stop loss strategies will help maximize your returns while limiting downside, especially in wild markets. Using stop losses effectively will improve your trading, increase returns with proven strategies, and fully capitalize on technical analysis patterns.
The trailing stop works perfect with strategies with a maximum drawdown allowance. A trailing stop is a stop loss that trails the current price by a percentage or amount that the trader sets.
For instance, if a trader sets a trailing stop of 10% on a $100 stock, the trailing stop will start at $90. If the stock then moves to $120, the trailing stop will sit at $108. Trailing stops never retrace; thus, if the price were to fall from $120 to $100, the trader would be stopped out at $108 for a profit of 8%.
Trailing stops can be very profitable to traders who use them in tandem with technical analysis. Consider that a stock gyrates up to 10% a month – inserting a stop loss of 11% will ensure that the maximum normal gyration is considered while catching the stock before it falls out of normal range.
Normal market exit
The normal stop loss exit is set at the price the trader is willing to take for a maximum loss. This normal exit is usually 8% for stock trades, though it can be lower for more conservative approaches. Knowing how to generate profits can often be as easy as knowing when to cut a loss. The basic trading fundamentals of any strategy will always include a normal market exit.
This stop loss approach is geared to preserving trading capital rather than exiting the market. This stop loss is usually set much lower than the normal market exit and is used as an emergency backup rather than an exit. These types of stop loss approaches are adorned by short term scalpers and traders who base decisions on real time technical analysis.
A perfect exit
Some traders use stop losses just because they represent a free limit order. A stop loss will always be executed at the price for which it is set. Some traders move stop losses up into the profit area to set a profit point below the price for a positive worst case scenario. There are many ways to use a stop loss; none of them are perfect and they all need to be refined, but some of the best trading options come from the ability to place a stop loss.