Stock Market for Beginners – The Stop Loss

Setting a stop loss is arguably the most important step in any trading strategy, and interestingly, it is also one of the most neglected. You must determine and set it as soon as possible after taking your position.

They should settle just below recent support levels. Support levels are points where a stock heading down reaches a price where more buyers than sellers come to the plate, sellers are exhausted, and the direction of the stock turns up.

The most significant support levels form when a stock heads more sharply lower, then turns around and heads more sharply higher.

Like resistance levels, we can have minor levels of support, as happens every day when traders push price, to significant levels that are added every few days, to major levels of support that can last for months, years, or even longer. decades, depending on the growth of the company. and longevity.

A stop that hides below very significant support is less likely to be triggered than one that hides below not-so-significant support. This is because significant support levels require a lot of selling pressure to breach, while minor supports give way easily.

When deciding where it should be placed, what we need to do is take note of the most recent significant level of support. If we have been watching the action closely before buying, then the most recent significant level should not be too far behind us, nor too far below us.

The more significant the support the better, but if it’s not near your buying point, I’d normally stay at a maximum of 7% or 8%, although I’ve been known to go as high as 10% depending on the circumstances.

This means that you are using a working fund for each trade of US$10,000, the maximum loss you could sustain on any one trade is US$700 to US$1000.

However, your loss limit will generally be tighter than that maximum, and with experience even tighter. In most cases, bad trades are limited to around $300, which is a fair risk for profits averaging $2,000 for a full trading cycle.

You’ll get a better idea of ​​where a stock’s true breakout point is (and it varies considerably between different stocks and different industries) when you’ve done a few trades. You will find that you will hone your skills quite quickly.