If you have spent any amount of time trading the markets I'll bet you have developed an entry strategy and very likely an exit strategy. It is, after all one of the most important aspects of trading, what gets you in and what gets you out. The problem I come across is that many don't spend enough time on the stop loss and its location or timing. Today we will dig deeper into the stop loss.
Ok, first of all why do you choose an entry? What is it about that particular point on that particular product that makes you think it's an entry? Despite whatever technical indicators or tools you may use the underlying reason for buying something is that you feel that is the best price to get in before others buy it up no? And when you look for a target to sell the stock you are looking for the highest price to exit just before everyone else does. When it comes to stop losses we always seem to pick a dollar amount that we are willing to lose.
What if we looked at our stop loss the same as we do our entry only in reverse? What if we learned to identify key areas that would likely cause people to sell? Well in the day trading world this is pretty common and many traders use technical reasons for exiting. It could be a break of "support" such as a prior low or congestion area from the past. It could also be a timing issue. Many trading strategies have entry triggers that are very similar to other strategies but the stop is based on time (usually 5 minutes). If there isn't some level of movement in 5 minutes the trade is over. So for day trading this can be learned quickly.
In longer term investing one of the most common reasons taught to sell for a loss is if a stock has a decline of 7-8%. Now this has a few variations. One is a 7-8% decline after a breakout to new highs while others include stop losses of 7-8% from entry points. Oddly enough if you look at popular S&P 500 stocks you can see those very areas show increased volume and more volatile days.
The point is that if you spend some time on exits just as you do your entries you will become fine tuned as to what causes people to sell and where. Hope this saves you some money!
