Placing stops: Mastering trade management and risk control
Trade management is a key skill to grasp and a good entry price will enable you to reduce your stop size. Entering a stop is simply where you place an order in the market where you will 'exit' the market if your trade goes against you. You should always, always place a stop level as soon as you enter a trade. The benefit of using stops is that it gets you out of the market instantly. The market can have shocks and surprises and run for hundreds of points in certain situations. You never want to be in a trade without a stop if you want to ensure you keep trading. So, be resolved to put your stop order in straight away, and preferably as you enter the market.
How to decide on the size of your stop
You size of stop will depend on a large number of variables. Are you swing trading? Are you only expecting to be in the trade for 1 day? Are you basing your trade off the weekly chart? However, as a very rough guide, when you are day trading, you would usually want to consider a stop of around 25-50% of the daily average range. The average range of the chart you are trading can give you a good rough guide as to the size of stop you should be using.
How your entry price impacts your size of stop loss
Once you have properly conducted your analysis for your trade (this article assumes that you have a good fundamental or sentiment bias for your trade) then you need to look for a key place to enter. Let's look at an example. Around the 23 October I was looking to buy Gold. The equity markets had been tumbling, the Italian budget crisis was in motion, the US China trade war was bubbling away and Gold had been bought strongly as investors looked to use it as a safe haven again. I considered that the time was right to buy Gold. I identified the 100EMA as the place that I wanted to enter. You can see my entry marked on the chart below by the small blue arrow just above the 100EMA on October 24. Sure enough, price moved down to the 100 EMA. I waited to see how price would react to the level and the rejection confirmed my analysis. I knew I wanted to enter long. As price returned to the 100EMA again, I entered a long with a very tight stop. I knew that my entry level was correct and any further falls down through the 100 EMA would mean that my analysis was incorrect. The equity markets were continuing to fall and at the time it was the S&P 500 falling, so I entered with confidence and made a profit that was more than double what I risked. My stop could be tight because I entered at the right technical place. Specifically that was a place where the 100 EMA and a horizontal support level met. By looking for key places to enter, you can ensure that your stop is as small as possible. Obviously, the smaller the stop you can use the better.Place your stop in a place that you think price should not get to if you are correct in your analysis. Look for them and then, once you have found them, use them as your entry prices.
Moving your stops to breakeven
Now, once price moves in the direction of your trade you know that you can start reducing your risk. In the trade example above, once price had moved above the 50EMA just above the entry price and cleared the overhead highs at 1233.00, you could have considered moving the stop to breakeven. Risk would have been managed and limited. In certain situations it is also possible to trail your stop as you move into profit
How a good exit helps you keep profitable
Now, it won't matter how cleverly you place your stops if you don't take your profit. Make sure that you do actually take your profit. Use an area just before key technical places as targets. In the trade above there was an obvious place to take profit and that was at the overhead highs of 23 October. When I came to my desk on October 25 and saw price at those highs I took profit. I am very glad I did as I would have otherwise been taken out at breakeven.
So managing your trades is a developed skill. This article has shown you that by choosing your entry place wisely, you can limit and reduce your risk in order to maximise your reward.
