Stop loss & trailing stop loss answers

[trants4md]

Stop Loss & Trailing Stop Losses (Reposted from Prior Date)

When you ave been trading long enough you will find that YOU WILL NOT ALWAYS BE SITTING THERE WATCHING WHEN SOME DISASTER HAPPENS!

A thousand things try to get between you and you trading. Just as today. My wife and Daughter who was home for the holiday, just had to pester me. They just had to hang about ten paintings in the house. An no they just were not willing to wait until the markets closed. The tickers looked good when I went to the other end of the house.

But when I got back it changed. Tell me it has never happened to you. Go ahead. Other days, I just go to town and let this run itself. I certainty don’t cash out my positions to leave the house.

To protect yourself from unexpected changes in the markets you should always use protection. No not that...

These: STOP LOSSES

Now I do not know every platform but you should see under the BUY / SELL selector other choices besides BUY & SELL, things like;

BUY
SELL
SELL SHORT
BUY TO COVER

On the TYPE of order you will get something like;

MARKET
LIMIT
STOP
STOP LIMIT
TRAILING STOP

You should learn to use "STOP LOSS" settings on your trading platform. Every platform should have a good tutorial on their use and should be consulted as they may differ slightly in actual execution. There are several types;

1. Fixed Value Stop loss called a "STOP ORDER"; You set the price that the stock can go down to or up to and at this price the computer at the brokerage will generate the Buy or Sell order for you. (You wondered where all the computer trades came from didn’t you!) So this one you set at a fixed price in dollars and cents. Of course if you trade in another currency, it translates to your platform as well.

This courtesy of Scottrade Tutorial;

Stop Order

Stop orders are an order to buy or sell a security when its price surpasses a particular point, limiting the investor's loss or locking in his or her profit. Once the market price surpasses the predefined entry/exit point, the stop order becomes a market order, and is then handled as defined under the definition of a market order.

This type of order is also referred to as a "stop-loss order".
Stops are not a definite guarantee of getting the desired entry/exit points. For instance, if a stock gaps down then the trader's stop order will be triggered (or filled) at a price significantly lower than expected.

Buy Stop Orders - The stop price is set above the current ASK price

Sell Stop Orders - The stop price is set below the current BID price

Depending on market conditions, once the order is triggered, there is no guarantee of the execution price and the price received may be several points away from the stop price.
　
2. Trailing Stop Loss, I feel this is the "best to use" and I strongly suggest you give it thought and on each stock where you place one try to identify the NORMAL daily trading range. Some stocks will move say .50 cents up or down everyday and you do not want to set these in that trading range:

This courtesy of Scottrade Tutorial;

Trailing Stop Order

This is a complex stop order in which the stop price is set at a fixed percentage or dollar amount above or below the market price. If the market price rises, the stop price rises proportionately, but if the stock price falls, the stop loss price doesn't change.

A Trailing Stop is a Stop Order that is set at an amount below (for a long position) and above (for a short position) the market price. The amount is automatically adjusted as the price of the security fluctuates.

The Trailing Stop order is designed to let the price of a stock go up indefinitely (in the case of a long position) and close the position when the price falls a set amount, potentially protecting the client from losing profits. Trailing Stops can be entered as a sell to protect the downside of a long position, or as a buy to protect a short position.

General Requirements:

Only on Equities trading over $1.00 per share – NO Penny Stocks or Pink Sheets. Only for the Regular Trading Session, does not cover the Extended Hours. Orders will be adjusted for cash dividends You may place GTC (good until canceled) instructions

Trailing Stop Amount Requirements:

Points – The dollar spread between the current market price and the order trigger price, which is entered in the "trailing stop amount field" 1 point = $1.00

Points entered may be in one-cent increments. The minimum point spread that can be set is .01; meaning 1 cent

The maximum point spread allowed is an amount equal to the stock's price

Percent – The percent spread between the current market price and the order trigger price, which is entered in the
"trailing stop amount field" Percent amounts may be entered in 1% increments The minimum percent spread that can be set is 1%. The maximum percent spread that can be set is 99%

Note: Do not translate and enter the percent in decimal format. Enter 1 for 1%; do not enter .01 for 1%

Now you have all of that but you still may want to know how to use them right!

Well when you are Long (You buy the stock) and you want to earn all the money you can to the upside but you really don’t want to see the profit evaporate is it sudden drops, then this is the tool for you.

Once you buy a stock, you place the Trailing Stop Loss "sell" order. As I mentioned earlier, you need to have an idea how wide of a trading range the stock typically trades within. You also need to determine how much you are willing to actually loose on this stock. Lets use the $5.00 stock for the examples.

$5.00 and I am willing to loose no more than $1.00 per share if I called it wrong. Now if I looked at this and the stock appears to climb .75 cents or dip .75 cents in violent swings then I would put a 20% Trailing Stop Loss on initially.

Should the stock drop $1.00 from my purchase price the stock would be sold by the brokerage. But the good part is lets say I called it right and it jumps on the first day to $7.75, well then the stop loss would have adjusted up with it to $6.20 ($7.75 x 20% = 1.55 so $7.75 - 1.55 = sell @ $6.20

But now that you have gained some ground I suggest you adjust the value of the Stop Loss to a smaller %. We said in this example that this often moved up or down .75 cents. So in this example you could lower your stop to maybe 10%. That could be a bit tight however. 15% could give you a bit more room to wiggle, shall we say. The higher the stock price goes the lower the percentage you want on it.

Also if you have reason to believe a stock will drop you can tighten up the stop even more.

An example is my current Bank of America (BAC) play. I strongly expect the stock to fall perhaps 10 to 20% early next week. The stock price this morning was $12.35 and I tightened up the Stop to 2%. Today the stock climbed up over $12.75. Now it never dropped the .25 below the levels it reached to trigger a sell. 2% is very tight. But as I expect it to fall anytime I want to close sell as soon as the drop occurs.

I intend to buy back into this stock once it drops. I use this method to pull the maximum profits from this stock.

Here is the profit history of the BAC play

Bought BAC @ ............ 3.73
STOPPED OUT @ ..... 7.28
Bought Again @ ........... 6.70 ........ .58
STOPPED OUT @ ..... 10.41
Bought Again @ ............ 9.44 ....... .97
STOPPED OUT @ ...... 14.01
Bought Again @ ........... 13.50 ..... $ .51
.................................................. ...$ 2.06
Plus Buy & Hold Increase .......... + 9.77
Total Earned With TSL’s ...........$ 11.83

Now I had about .01 commission each way (Buy / Sell) that reduced the actual earnings by .07 so the net was $1.99 per share additional earnings from this TSL program trades. But as you can see we exceeded the $9.77 "Buy and Hold" earnings easily.

I hope this gives you some ideas on why to use TSL’s.