Advanced Stop Loss Tactics

Keep winners longer and get out of losers sooner

Managing Risks with Stop Loss

The primary goal of any trader is to risk as little as possible to make as much as possible. And one of the most effective tools to achieve that is proper stop-loss positioning.

So how do you set a stop-loss that aligns with this objective? The key is to find the sweet spot that avoids the typical crowded levels or by not having your stops too tight or too wide.

There will always be losing trades, yes. Just remember that the aim isn’t to avoid being stopped out, rather, it’s to use stops efficiently to protect your capital.

When to Use Tight Stops

There are specific setups where a tight stop-loss is not only appropriate but also necessary. These include:

  • Momentum Plays: When price is expected to move quickly in one direction.
  • Flags: Short-term consolidation patterns that break out in the direction of the prevailing trend.
  • Exhaustion: When price has reached a peak or trough and is expected to reverse.
  • Breakouts: When price moves above a resistance level or below a support level with increased volume.

In these scenarios, your trading thesis demands immediate momentum, making a tight stop-loss essential.

Navigating Crowded Stop Levels

Crowded stop levels are price points where a large number of traders have set their stop-loss orders. These are usually:

  • Under lows
  • Above highs
  • At significant key levels

While it’s best to avoid these crowded levels, sometimes it’s unavoidable. In such cases, consider splitting your stop order into smaller portions, like 25% or 50%, to mitigate risk.

Time-Based Stops

Time-based stops are triggered after the price spends a certain amount of time below a key level or after a bar closes.

Pros: You avoid being stopped out prematurely due to price wicks or spikes.

Cons: You lose some control over your risk.

Using Stops with Discretion

Exercising discretion when setting stops requires a high level of discipline and a clear set of rules. Here are some considerations:

  1. Price Action: If the price spikes into your stop zone but suggests a temporary move, you might give it time to resolve.
  2. Time: Observe how the price behaves within your stop zone.
  3. Volume and Volatility: Monitor for sudden spikes that could influence your stop.
  4. Immediate Actions: If the price breaches your stop level, consider placing a new stop behind the recent swing.

Moving to Break Even: A Personal Decision

Moving your stop to break even is a subjective choice. While some traders see it as a false sense of security, others prefer to eliminate risk as soon as possible. Tightening your stop increases the likelihood of it being triggered, so weigh the pros and cons carefully.

Strategies to Consider:

  • Have a fixed price target before moving the stop to break even.
  • Set a time duration for when you will move the stop.
  • Consider moving 50% of the stop to break even and leaving the rest as is.

Wrap Up

Stop-loss strategies are indispensable for managing risk and protecting profits. However, setting the right stop-loss requires a clear understanding of the trade setup, market conditions, and your personal trading style.