How to Choose the Right Stop Loss

[Trading With Larry Benedict]( How to Choose the Right Stop Loss By Larry Benedict, editor, Trading With Larry Benedict Recently, I received a question about what I recommend doing with a stop loss order. I thought other readers might have the same concern, so I wanted to share my answer. Here’s the question… Stop loss orders give me peace of mind. What would you recommend on that? A percent trailing stop maybe? Feedback would be highly appreciated. – Sherif S. Hi Sherif, thanks for writing in. Most investors know that setting stop losses is key to managing risk in the markets. Without a stop loss, an investor doesn’t have a clear and concise way of knowing when to cut a position. So rather than exiting at a predetermined level, investors without stop losses often end up cutting a position based on pure emotion… Typically, when they can no longer bear the pain. And that’s something that could end up costing them a lot of money. However, when it comes to setting stop losses, it’s not always easy to know exactly where to place them… Recommended Link [Market Wizard who made $95 million for his clients in 2008 – and predicted the 2022 collapse back in January – reveals his strategy:]( [image]( The One-Ticker Retirement Plan How to make all the money you need – in any market – using a single stock. [Click here for the name of the ticker…]( -- Stops in a Volatile Market Some investors stick with a simple fixed stop loss – a fixed percentage or dollar amount below the stock’s price. But given its rigidity, it can be hard to get it right across different market conditions… like when a stock becomes volatile and starts swinging unpredictably. However, one helpful method that offers a more nuanced solution is one that uses the Average True Range (ATR). The ATR calculates the average range of a stock (or index) over the preceding 14 days (some might use a longer time frame). So if volatility is steadily increasing, then so will the ATR (and vice versa). It’s useful because it reflects the current volatility of that stock (or index). Since stocks typically fall more dramatically than they rise, the ATR usually increases during pullbacks. Just take a look at the SPDR Dow Jones Industrial Average ETF Trust (DIA) chart below… SPDR Dow Jones Industrial Average ETF Trust (DIA) [Image] Source: eSignal When DIA’s stock price rose from ‘A’ to ‘B,’ the ATR fell from $6.78 to around $4.35… And when DIA fell from ‘B’ to ‘C,’ the ATR climbed (from around $4.35) back up to $6.50. While they’re not an exact mirror image, you can see a clear inverse relationship between the ATR and DIA’s stock price. To give a stock enough room to move, typically an ATR-based stop is set as a multiple of the ATR… often three, four, or five times. For example, if the ATR is $5 and a stock is trading at $100, a trader using a multiple of three times ATR will have a stop loss at $85 – or $15 below the stock price. [The One Ticker Retirement Plan Over the Shoulder Demo Now Available]( Remember, the goal is to capture as much of the move as possible. The whole idea of setting a stop is to protect traders from a move in the opposite direction – without being stopped out unnecessarily. If we set our stop too tight (too close to the current price action), then we run the risk of getting stopped out prematurely… meaning we could be giving up plenty of profits. So how do you apply it? Free Trading Resources Have you checked out Larry's free trading resources on his website? It contains a full trading glossary to help kickstart your trading career – at zero cost to you. Just [click here]( to check it out. Using ATR With Trades How you use an ATR depends on your time frame. For instance, a short-term trader who wants to capture lots of little profits (without risking too much) might use a lower multiple (like two or three). So if the ATR in our DIA example is $5, then you might only allow the stock price to fall $10 (using an ATR multiple of two) before you’re stopped out. However, a long-term trader – one who wants to capture a move that may last for months or years – might use a much higher multiple (five or six). It should be enough to capture the full potential of an up move without getting stopped out by a quick pullback. The key is to look at the price chart and work out what multiple suits your goal from the trade. Like anything in the markets, it’s not a perfect solution. However, it certainly helps put the odds in your favor. Using an ATR as part of a stop loss strategy helps fine tune your exit strategy. Most importantly, it lets you have a defined exit point and gives the stock sufficient room to move so that you’re not stopped out prematurely. Regards, Larry Benedict Editor, Trading With Larry Benedict P.S. If you’d like a question addressed in a future mailbag, you can write in to feedback@opportunistictrader.com. IN CASE YOU MISSED IT… [Retire Rich from This Document]( See the document below? It’s a list of the 500-fastest growing companies in North America right now. The companies on this list are growing 200%... 1,000%... 10,000%, plus much, much more… And one small-town millionaire says [a secret inside this document helped him make back his millions after he lost it all.]( And he’s not alone. A few people he’s shared this secret with have reported incredible results like… - “My portfolio last year beat the Dow and S&P.”* - “30K last year.”* - “This has helped me build a seven figure portfolio”* If you’d like to see how to get rich too from these fast-growing companies… [Click here for the full story.]( *Verified customer. Past performance doesn't guarantee future results. [image]( --------------------------------------------------------------- Get Instant Access Click to read these free reports and automatically sign up for daily research. [The Trader’s Guide to Technical Analysis]( [The Ultimate Guide to Taking Back Your Privacy]( [An Insider's Guide to Making a Fortune from Small Tech Stocks]( [The Opportunistic Trader]( The Opportunistic Trader 55 NE 5th Avenue, Delray Beach, FL 33483 [www.opportunistictrader.com]( To ensure our emails continue reaching your inbox, please [add our email address]( to your address book. This editorial email containing advertisements was sent to {EMAIL} because you subscribed to this service. To stop receiving these emails, click [here](. The Opportunistic Trader welcomes your feedback and questions. But please note: The law prohibits us from giving personalized advice. To contact Customer Service, call toll free Domestic/International: 1-888-208-6550, Mon–Fri, 9am–5pm ET, or email us [here](mailto:feedback@opportunistictrader.com). © 2022 Omnia Research, LLC. All rights reserved. Any reproduction, copying, or redistribution of our content, in whole or in part, is prohibited without written permission from Omnia Research, LLC. [Privacy Policy]( | [Terms of Use](