What I’ve learned, what has worked, what hasn’t worked, and what may help you after $845,203.28 worth of trades in 4 years.
Exactly Where to Place Your Stop & How to Size Your Trades
A stop loss is an order to sell a security or commodity at a specified price in order to limit a loss. You have two options when it comes to placing a stop loss.
- Percentage Loss
- Technical Analysis
The first option when placing a stop loss is determined by a percentage loss per trade. Let’s use 25%. This means you will never lose more than 25% on any single trade. If you’re average entry is $100, then $75 is your stop loss.
The next option is technical analysis based. You should place your stop loss where your trade idea is no longer valid. Simple question to ask yourself is: “Would I enter this trade if price dropped below $X. If the answer is no, that is where your stop loss should be placed. This level is often an important support or resistance level.
Now that we have a stop loss, we can determine position size. Your position size should be based on max risk from your account balance. Your max risk should be between 1-5% of your total account.
If your account balance is $10,000 and you determine your max risk to be 3%, then your max risk is $300 per trade. That is not your position size.
Your position size is your risk in dollars divided by your stop loss in percent.
Example:
Account Size = $10,000
Account Risk % = 3%
Account Risk $ = $10,000 * 3% = $300
Stop Loss = 25%
Position Size = $300 / 25% = $1,200
And if you’re struggling sticking to your stop loss, please set market order stop losses.
Talk soon,
Michael
ps. if you found this information useful, forward to a friend 😊
Stockonomy
What I’ve learned, what has worked, what hasn’t worked, and what may help you after $845,203.28 worth of trades in 4 years.
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