The Stop Loss Order

The Stop Loss Order

Recommended strategy which profits handsomely using stops: Ten Steps To Profitable Trading.

For stock market beginners, here’s something you should know about where and when you should set your stop loss.

Immediately or as soon as practically possible after taking a position in a stock we need to place our stop loss order.

With the stop loss we don’t want to get too close below the support level. If the stock retests the support level under which we placed our stop loss (as it often does), we need to be careful of the market makers extending the selling block to a little below that support level, triggering the sell orders that are in the near vicinity.

We don’t want our stop loss to be part of that selling block if the stock does test that support level again. You should place your stop loss between a quarter to half a point below the most recent significant support level.

When you have chosen what price you want to set your stop loss at then set it to sell at market price. You can use limit orders (meaning you sell for only a fixed price) but if you are trading a high volume of stocks and your order cannot be completely filled you could be left holding shares now priced below our stop loss.

If you want to preserve and protect your working capital then you must use an automated stop loss. If the price does go the wrong way, and some trades will, then you want to avoid having to be responsible for actively pulling the trigger to make it happen.

The surest way to trade is to find out you have been stopped out after the fact. You can go back and have a look why after. Perhaps you were too close with your stop? Perhaps some bad news hit the headlines that same day and there was some panic selling.

Perhaps its more serious, like the company plant caught fire and the stock price has just started a very long and protracted drop in price from which it may never recover.

Either way, at that point you would be out, your money would be safe (less your loss amount) and you would be ready to try again or move to another stock. There is more to learn about setting stops in the Secrets Of Successful Traders review.

Setting the stop loss after capitulation

Along with being able to buy in at a very low low at capitulation, capitulation also allows us to set an extremely tight stop. So tight in fact that if it gets triggered we will be out with very little more lost than the price of the trade.

How do we do this? When buying on capitulation day we do so at about 30 minutes into the trading day when our stock opened way down and the first 15 to 30 minutes were panic sellers throwing in the towel.

This is the point the smart money step in, take their positions and create a turning point in the stock’s direction. That ‘turning point’ – about 30 minutes into the trading day – marked a very deep, very sharp resistance level. One that will likely hold for at least the medium term, maybe longer.

If you have capitalized on the capitulation and bought in at that point, then you can set your stop very close to the lowest point of the day, and quite quickly too, meaning there is very little chance the stock price will be back to test that support.

Even if the worst does come to the worst and the stock does drop again (maybe additional ill timed snippets of bad news), then your stop loss is so close if it gets triggered it’s not really a big deal.

Very low risk for very high gain. Catching a stock at capitulation can add a few more percent to your profits from this trade, plus set you up for one of the best runs you can get – that is buying at a very low low (capitulation day) and selling at a very high high (a sort of ‘anti-capitulation day’), sometime in a couple of months from then.

There’s a great little trading strategy which profits handsomely from using stops. Not just the stop loss, but a break-even and trailing stop as well. It’s called the Ten Steps To Profitable Trading and it’s worth a look at, especially for beginners. I’d seriously recommend reading the sales page even if you have no intention to buy, as it summarizes its ‘Ten Steps’ strategy and that’s enough to give you a reasonable idea about how to use stops in your trading strategy. You can learn more about at

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