Earlier today I received some terrific questions from a very sharp woman about trading and Stop Losses. I really appreciate the questions as it guides me to know what my readers want to know. So Nancy H – thank you very much.
In an earlier posting about using a 15% stop loss, I only covered what to do if you bought a stock or an option and it lost value. I do not want to lose more than 15%. I want to cut my loses short and let my winnner run. Once I am in a trade, I will look at my chart daily after the market closes when I will then adjust my stop upward – never downward.
If my trade is positive my 5%, I will move my 15% stop loss to a -10% of my original entry price. Let’s say that the next day, my trade was up by 15% from my entry price. In this case, I will move my stop loss to breakeven or at the price that I bought the stock/option. The next day, say my stock/option was up by 25%, so I would move my stop to +10% of the original entry price.
At this point, I know that I will keep some money in my pocket. If the stock moves up to +50%, my stop will be at +35% (50% – 15%). If the stock drops down below my 35% profit, my stop will automatically get me out of the trade. I don’t want to get greedy. I am pleased with a 35% profit. A little better than a 2% return on a typical savings account!
Following a stop loss rule such as the above, keeps me out of emotional trading. I don’t second guess the market. I don’t second guess the stock. I have no sleepless nights wondering if my stock will come back.
Make sense? Your thoughts and comments are appreciated.