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:
The
percentage method
The support method
The moving average method
The Percentage Method
The Percentage Method
The percentage method for setting stop losses is one of the most
popular methods investors use in their portfolios. trough 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
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, There
are two primary methods for finding stop-loss points using price action.
Ideally, we want the market to stay away from
our stop-loss point. Hence, for long trading setups, using support levels as
stop-losses is logical. The same goes for using resistance levels to set
stop-losses for short trading setups.
The Moving Average Method
In 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.
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