Using Stops Education (Video)
We have covered stop loss orders pretty in depth here on the site and late last week I ran across an educational clip from our partner INO.com on stops that we found interesting.
Click here to watch the video. The video is just over five minutes and offers the following three stops to consider and breaks them down:
(1) Dollar stop.
(2) Percentage stop.
(3) Chart stop.
1) A dollar stop, is when you set a predetermined dollar amount to a trade. Let’s say you want to risk $500 on a grain trade or $750 on a stock trade. Once you get your fill back from your broker or electronically online you simply figure from your fill price where to put your stop.
Pros: Easy to implement and use.
Cons: Can place stops too close in a volatile market
2) Percentage stop, is a very simple way for you to place a stop on a position. Here’s how it works. Let’s say your trading account is 100,000 dollars and let’s say you only want to risk 1% of your total portfolio on any one trade. You simply take a $1,000 risk which represents 1% of your over all portfolio. This can help enormously in avoiding taking BIG LOSSES. A 1% loss is easy to absorb. A 30% or 40% loss in a trade is an account killer, and should be avoided at all costs.
Pros: Easy to implement and use.
Cons: Can place stops too close.
3) Chart stop, a chart stop is where you place a stop that is either above or below a crucial chart level. The good thing about a chart stop is that this level is often used by other traders. That can both be a good thing and a bad thing, here’s why. Using either one of our first two examples only you know where the stop is. With a chart stop, a great many traders/brokers know that is where the stops are. In an illiquid market this type of stop should not be used, as many times brokers gun for the stops. In a highly liquid and active market this is a good stop to use.
Pros: Very easy to implement and use.
Cons: Can’t be used in thinly traded markets.
Watch the video and see what you think.
I want to add one quick note on the first type of stop, dollar stops. Anytime you place a dollar stop or a hypothetical stop in your head you must be conscious of the fact that your emotions will play into the sale. Basically, when your stop is reached then investors have a tendency to convince themselves to stay in the stock anyway instead of being disciplined and selling for a loss. This is one of the toughest parts of the market.
For further reading on Stop Loss Orders and other order types check out these posts:
- Investors Guide to Stop Loss Orders
- 10 Stop Loss Order Tips for Success
- Market Orders and How They Work
- Stock Limit Orders and How They Work
- Using Trailing Stop Orders With Your Online Broker
