The Breakeven Stop
Once we have bought into the stock and we have placed our stop loss order, the next step is to move our stop loss up to our buy in point, effectively protecting 100% of our trading capital.
This will mean that if something happens and the stock turns again and we are stopped out, we will have lost nothing but our time, perhaps the cost of the trade (depending on exactly where the breakeven stop gets triggered), and maybe some minor bruising to our egos.
We would call this a ‘cost-of-trade loss’. In the bigger picture this will be the cost of a lesson in something, somewhere. A small price to pay if the lesson is learned.
Be careful not to move the stop loss up to a breakeven stop too early. You should give it a few days at least and allow it to make a new significant support level going up.
Also, if we have just taken advantage of a prior price pull back and bought in after a reasonably sharp turnaround (not capitulation), then there is a danger we need to be wary of. Fundamental analysts would call it the ‘double bottom’.
Just like the double or triple top at the buy in point, often a stock will test a significant support one or two times before heading back up. In most cases, this will probably happen within a few days of it first bouncing off that support.
We must give it enough time to do that if it is going to.
We obviously do not want to bring up our stop loss until this has happened. We don’t want lots of small cost-of-trade losses, they can add up. On the other hand it may not happen. Possibly it may happen a third time (a triple bottom). Our next move will need to take all this into account, and that means giving the stock time to do what it needs to do.
Getting a feel for the way stocks move like this will take a little time and experience (this is what you will gain at the cost of a losing trade). Trust me, in the end your experience will be far more valuable to you.
When it comes to moving our stop loss up to a breakeven stop at the right time, there is a couple of things we must look for.
If the stock heads upwards and seems to be getting well clear of your buy in point, has created a support level and at least three trading days have passed since you bought in, then you can consider moving your stop loss up to a breakeven stop.
Leaving it for five days would on occasion be better, especially if the stock is not advancing confidently or is not making new minor support levels going up.
If the stock does come down and bounces off the support level (just above our stop loss) we can only hope that there is enough leeway for our stop loss to not get triggered.
Assuming it doesn’t get triggered, and the stock drifts back up then we are back to breathing regularly again and hoping that the stock will carry on going up.
Move your stop loss to its new breakeven stop position (i.e. to the price point where you bought in) when you are confident there is little threat that the stock will turn down again in the near future, and if it did, would probably take at least two or three days downward drift to reach you.
Better still allow it to create a new significant resistance level, a new significant support level, then subsequently break through that new resistance level to start another run away from your buy in point.