The Art of Stops

When it comes to stock trading people are always trying to find ways to limit their risk. One of the most commonly used methods are stops.

The overall purpose of stops are to take you out of a trade after the stock hits a certain value. By using them properly, essentially your stock trade should be able to run on its own without you having to watching it minute by minute to make sure the stock is not slipping lower and lower.

Depending on who you ask, many people have different feelings about stops. Some people like to use the built in fuctions in their trading platform, others like to keep a mental note, and then there are those who would rather just take it on the fly.

I really don’t care about what method people use, so I will just share what different kind of stops there are.

There are three types of stops:

• Dollar Stop
• Percentage Stop
• Chart Stop

Dollar stops: Pretty straight-forward. Pick an exact dollar price where you want to unload your shares. For example, if you bought shares of Stock X at $28, then you might keep a loss at $27.50.

There is really no right or wrong way to determining the stop price; however, you should take the overall market and the particular stock into consideration. If things are volatile, then $27.50 might be too quick of a stop.

Percentage Stops: Pretty much the same as dollar stops except u pick a percentage rather than actual dollar price. So instead of picking $27.50 for Stock X you might pick 2%.

Most people use this method, if they utilize stops for every trade (i.e. for every trade, they just don’t want to experience X% loss).

Chart Stops: Probably the least common out of the three. Chart stops allow you to see to select a point above or below the buy price, on the chart, as a stop.

Just like most technical analysis though, many people can see these stops coming. This can cause for many traders to game the market.

In such a volatile market, it is almost key to be cautious when determing your stops. Obviously, you don’t want to set them too early nor too late. Play around with them, until you find the one that is best for your trading style and thinking.

Do you utilze stops in your trading?