Setting Stop Loss Orders
Stop loss order levels need to be technically consistent, otherwise they will cost you money. Arbitrary levels are likely to be activated by the normal cycle.
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Base your stop losses on technical levels, such as:
- Support/ resistance levels,
- Above/below the most recent peak/trough,
- Above or below reversal signals; or
- At the crossing of moving averages.
Example
This example illustrates the use of 2 different technical levels for stop losses:
- The first stop loss is placed just below the level of the most recent trough.
- The second stop loss is placed below the support line (on a reversal signal above the support line).
Support and Resistance Levels
Avoid placing your stop loss exactly at the support or resistance level for two reasons:
- Trends often reverse at these levels and you may be stopped out unnecessarily;
- A large number of stops may be set at the support or resistance level, especially where it has formed at a round number.
Rather set your stop loss one or two ticks below a support level or one or two ticks above a resistance level. For example: If a support level has formed at $20.00, set the stop loss at $19.90 so that you are only stopped out if the support level is penetrated.
