Aug 28: The Day Traders Secret Art of Setting Stop Losses

When day traders first begin considering their stop losses, keep in mind this comment from Tom Baldwin, a leading day trader. He said, “The best day traders have no ego.” This article will teach you the prime day traders secret art of setting the best possible stop losses. This will immediately boost your trading to a completely new level.

Successful day traders are faced with losses constantly, and they swallow their pride and get out of the position when they have to. This allows day traders to survive in the market long enough to be successful. Day traders set their stop losses, and then stick to the plan.

How do day traders go about setting stop losses? There are several different ways. Day traders could base a stop loss on a percentage retracement, where the allowed share prices retrace a certain percentage of the entry price before the exit. Different indicators can be used to identify where the stop loss is going to be set. Day traders could also use support and resistance stops to set the level at which exit is made. The key is to simply have a stop loss in place.

Personally, I find these options too subjective. I prefer having a mechanical way to calculate my stop losses, so I use a volatility based stop. The reason I use this type of stop is because volatility generally represents a measurement of how quickly the stock either rises or falls (market noise). Consequently, if I measure the stocks volatility, and take a multiple of that value, I`m probably going to have set my stop loss beyond the immediate noise of the market. This ensures I am not stopped out of a position too often.

Day traders can measure volatility by using the Average True Range (ATR) of a stock. This value can be found with most charting packages. Basically, the Average True Range (ATR) indicates how much a stock will move on average over a certain period. For example, if day traders had a one dollar stock that moved up five cents on average over the last 20 days, that doesn`t tell day traders whether the stock is moving up or down. It just tells day traders on average how much the particular stock moves. The average true range is a great tool and that can be utilized in the day traders trading plan for more than setting stops. If day traders are not familiar with setting stops, I recommend day traders to do research. One place for excellent article sources is at the System Trading Blog .

Day traders use indicators in calculating the stop loss by subtracting a multiple of the Average True Range (ATR) from the entry price. For instance, I could take two times the ATR and subtract it from my entry price. If we look at the example, I just touched on, with a one dollar stock, an ATR value of five cents and a multiple of two the amount is ten cents.

Which, subtracted from our entry price of one dollar gives a stop loss value of 90 cents.

Before day traders even enter a position, they should know where the selling point of the stock should be. If the share price doesn`t move in the day traders favoured direction, but moves against them, day traders will know when to sell. Emotions are removed from the equation, and they simply follow what the stop loss dictates.

This is how most successful day traders limit their losses. They know when they`re going to sell before they begin trading. Although their methods of calculating this stop loss may vary, all day traders have a stop loss in place. The stop loss is a crucial part of the day traders trading system. Without it, even the best designed trading system can`t deliver profits.

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