Stop Losses
I can't stress enough how important stop losses are. You are literally cutting of an arm or a leg in the trading world if you aren't using stop losses. If you aren't going to use stop losses at least have some kind of mental stop loss. A stop loss is like an insurance policy. It protects you if your trades go bad. With a stop loss your position will automatically be sold when the stop reaches a certain point. Using stop losses is a great way to manage your risks. It takes away the emotional burden of clicking the sell button. Some traders have a tendency to average down or to add more shares at a cheaper price to a losing position in hopes of gaining back the losses as the market recovers. The problem with this is that the market won't always go as you planned and you could end up with greater losses.
The problem with stop losses is that people are scared that they will get shaken out by the market gyrations and meaninglessly lose money. Your security needs room to breathe. 7 to 8% is good for intermediate term trades; anywhere from 1 month to 3 months. If you are still too scared to use stop losses, pick prices that you are certain won't shake you out. Even if that mean putting stop losses like 10-15% from your entry point. Short term trades and day trades should have tighter stop losses but also a quicker exit plan. There are several ways to put stop losses, but your rule of thumb should be to put stop losses below supports on the long side and above resistance on the short side. Click here to see support & resistance. On the long side stop losses can be a few percentage below breakout points, trend lines, moving averages and historic supports. The first chart is an example of putting a stop loss under the breakout point. The second chart is an example of putting a stop loss right under the trend line.
The problem with stop losses is that people are scared that they will get shaken out by the market gyrations and meaninglessly lose money. Your security needs room to breathe. 7 to 8% is good for intermediate term trades; anywhere from 1 month to 3 months. If you are still too scared to use stop losses, pick prices that you are certain won't shake you out. Even if that mean putting stop losses like 10-15% from your entry point. Short term trades and day trades should have tighter stop losses but also a quicker exit plan. There are several ways to put stop losses, but your rule of thumb should be to put stop losses below supports on the long side and above resistance on the short side. Click here to see support & resistance. On the long side stop losses can be a few percentage below breakout points, trend lines, moving averages and historic supports. The first chart is an example of putting a stop loss under the breakout point. The second chart is an example of putting a stop loss right under the trend line.
Trailing Stop losses
A trailing stop loss order is when a stop loss is set at a defined percentage away from a security's current market price. A trailing stop for a long position would be set below the security’s current market price,and for a short position, it would be set above the current price. A trailing stop is great for protecting gains by enabling your position to remain open and continue to profit as long as the price is moving in the right direction, but closing the trade if the price changes direction by a specified percentage. The magic in a trailing stop loss order is that it moves on its own. On the long side, your security will get sold only if it drops a set percentage below the highest previous price. Hence, trailing stop loss is a lot more versatile then you normal stop losses and takes away the effort of having to constantly move your stop losses as your security appreciates. Because, of the nature of the trailing stop loss, it's usually a good idea to give your security even more breathing room, but 9 to 10% is usually a good rule of thumb. Look at the second picture for a great illustration of how trailing stop works.
Buy and Sell Limits
Buy and Sell Limits are orders that will get filled when it reaches your target price. These should be used when you can't wait around to get your favored price. Don't confuse buy and sell limits with stop losses, it's very different. Buy limits are used to get cheaper prices than the current price and sell limits are used to get higher prices than the current price. Buy limits are used to enter long positions, and sell limits are used to exit a long position. The equivalent of buy and sell limit on the short side is sell short and buy to cover. When you use stop losses and limit orders you need to understand market gaps, and that you won't always get the price that you have placed on your orders. The market can gap and sometimes dramatically in pre and after market hours. You can place limit orders during pre and market hours but it's a bit more complicated, and won't get filled as easily as during market opens.