Setting An Initial Stop Loss Rules and Practice
Your Initial Stop Loss is something you set immediately after purchasing a stock. The purpose of the Initial Stop Loss is to protect unexpected downside. Any good trader would move their Stop Loss up as their trade became more profitable, or use a trailing Stop Loss to have it done automatically as the price goes up. But that magic little order is something we will cover in another lesson. Today we just want to talk about that very first Stop Loss.
The following Procedure is what you would want to follow when you enter a trade, to help you determine your Initial Stop Loss. There are 3 charts that you can practice as this week’s homework (usually we only do this on Facebook, but this one requires more description so we will have it up on our website). We will post the answers immediately below the charts after a weeklong homework contest on our Facebook page, give it a shot and answer on Facebook to win a random piece of choice Black Ink Econ SWAG! We don’t do grades here at Black Ink Economics, just playing cards with our logo. ????
When you’ve done the homework do check back for the answer! We will post it after someone on our Facebook Page wins our Homework contest!
Determining your Initial Stop Loss
- Identify the pattern you purchased on.
- Determine the lowest the price could drop and still be trading within that pattern. Make a note of this price by drawing a red line across the chart at this level.
- Determine the lowest the price could drop and remain in any bullish setup. Make a note of this price by drawing a dark red line at this level. If using a candle chart, use the top of the fat part of whichever candle, not the top of the whole candle.
- If trading near a 52 week low on a swing or Dip Buy, placing the Stop Loss below the 52 week low is ideal. This is an option especially when trading within 5% of the 52 week low.
- When choosing the specific price point, chose a price just below what a “common” Stop Loss idea might be. The idea being you can use them as a shield in case Market Makers come take those shares. Common stop losses are multiples of 5 and 10. My preferred stop loss ends in a 9 or a 4.
- Make a note of where your Stop Loss should be using a blue line
Practice (answer the following):
Pattern on Chart:
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Pattern on Chart:
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Pattern on Chart:
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