Knowing where to place stops

This is one very difficult topic to discuss and there are as many questions about this as there are possible answers. Knowing where to place your stops is just something that comes with experience. If the stops are too tight then you are setting them too close to the price action. The amount the price can move through the day can change from small moves in low volatility to larger move in periods of higher volatility. Obviously you can be tighter during periods of low volatility and wider when in periods of high volatility. To see this we use the ATR indicator (Average True Range). The ATR smoothes the intraday movement to give us an average.

I have indicated my stop levels on the BOQ chart in red that I move to manually, meaning that I do not use a trailing stop. The black line to the candle shows the point when I move my stop to that level which is the support. I set my stop just under the support because that can save you from being taken out if the support is tested and holds.

I feel that trailing stops have two main negatives. They are that you can be taken out of trades unnecessarily and they can also give you a false sense of security because the price action can gap down past the stop. The stop will not be executed at the stop level. In most cases the exit price will be much lower. It is much better practice to use indicators and exit the trade your self. You can still get the same amount of limited security offered by using trailing stops. Never rely on stops is what I am saying.

I entered the trade at point one in July at about $8.60 and I set my stop at the previous low.

You will notice at stop point four, I have set a quite wide stop, because the ATR has spiked to quite a high level, meaning possible larger intraday movement and volatility. I don’t want to be taken out unnecessarily here but I still want some level of protection if I am away from my computer.

At point six I exited the trade at $12.00 and my stop was there below that level at $11.50 but it was not hit. I exited the trade based on the indicators. You don’t know at this point if this is a short-term retrace or something more serious.

I enter a buy trade again at $12.00 and set my stop at point seven which is the previous low and on I go from there.

This is just a basic example of using stops. There is much more to it than this but you have a place to start if you want to try using stops effectively yourself.

Below: Daily BOQ chart I have shown my stop loss levels in red.

                                (Source:igmarkets.com.au)