Stop Losses in Trading
http://www.financial-spread-betting.com/course/stop-order-types.html PLEASE LIKE AND SHARE THIS VIDEO SO WE CAN DO MORE! For the next few lessons, we’ll be looking at the way that you minimize your losses if the trade runs the wrong way. This is by using stop losses, which can be orders to your broker to close your position if it runs too far against you, or if you are daytrading and watching the chart you can simply decide at what level you will exit the trade that’s not working out, and close the trade directly.
The first thing to note is that stop losses are only really appropriate when you’re trading, that is buying and selling to make your profit. You would use them if you are daytrading, buying and selling several times a day, or swing trading, where you might hold a position for a few days in order to get your profit. If you’re not looking to buy and sell for the profit, but simply investing for the long term on a stock that you think will go up in value, you wouldn’t normally set a stop loss, you would just accept the ups and downs of the market.
The first type of stop loss to talk about is the premise-based stop loss. This is so-called because you have a premise or reason for taking a particular trade, a clear thought as to why the trade should make you a profit. Following on from this reasoning, you should be able to figure out a position or value where it’s plainly not working out as you thought it would, or in accordance with your premise, and therefore you might as well quit the trade for a loss.
As an example, consider an uptrend followed by a pullback. Your premise is that the uptrend will continue after the pullback bottoms out, and you’re looking to place a trade when you think the price is bottoming in anticipation of it going up again. This is a simple summary of what can be a complicated decision, as, until it goes up again, you really can’t know whether the price has reached its lowest point.
But there are various clues, such as the double bottom pattern, which may help you out. If the retracement has found support at a certain level, starts back up and then returns back down to that level, you might think that this was a double bottom pattern which indicates the trend will continue, and make a trade on the return.
The problem with a stop loss is that you want to minimize your losses, should the trade be bad, and therefore don’t want the stop loss far away from your entry-level; but you don’t want the stop loss to take you out of the trade simply from noise in the price if you set the stop loss too tight. One way around this for the example given is to wait for evidence that the second time of touching the support has held, and then enter the trade on the upswing. This may mean you miss the first part of the reversal, but makes it more likely that the trend will continue and make you a profit.
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