How to Determine Where to Set a Stop Loss

Many investors struggle with the task of determining where to set their stop loss levels. Investors don’t want to set their stop loss levels too far away and lose too much money if the stock moves in the wrong direction. On the other hand, investors don’t want to set their stop loss levels too close and lose money by being taken out of their trades too early.

So where should you set your stop losses?

Let’s take a look at the following three methods you can use to determine where to set your stop losses:

Ø  The percentage method

Ø  The support method

Ø  The moving average method

The Percentage Method for Setting Stop Losses

The percentage method for setting stop losses is one of the most popular methods investors use in their portfolios. One reason for this method’s popularity is its simplicity. All you have to do when using this method is determine the percentage of the stock price you are willing to give up before you exit your trade. For instance, if you decide you are comfortable with a stock losing 10 percent of its value before you get out.

The Support Method for Setting Stop Losses

The support method for setting stop losses is slightly more difficult to implement than the percentage method, but it also allows you to tailor your stop loss level to the stock you are trading. To use this method, you need to be able to identify the stock’s most recent level of support. Once you have done that, all you have to do is place your stop loss just below that level.The reason is you want to give the stock a little bit of wiggle room before deciding to exit your trade. Support and resistance levels are rarely accurate to the penny so it is important to give the stock some space to come down and bounce back up off of its support level before pulling the trigger.

The Moving Average Method for Setting Stop Losses

The moving average method for setting stop losses is more simple than the support method, but it also allows you to tailor your stop loss to each stock. To use this method, you need to apply a moving average to your stock chart. Typically, you will want to use a longer-term moving average as opposed to a shorter-term moving average to avoid setting your stop loss too close to the price of the stock and getting whipped out of your trade too early. Once you have inserted the moving average, all you have to do is set your stop loss just below the level of the moving average.