7 Ways To Improve Your Stock Trading Results By Using Stop Loss Orders Wisely

There are a number of ways to use stop losses to better stock trading results. Some are very simple, while others are a bit more complex. I will try and keep it to the “simple” side of things here. Like most issues in stock trading, the method and details that you employ must be chosen to fit your individual trading style, as comfort and confidence are musts when it comes to being a successful trader.

I have helped hundreds of traders over the years in my chat room and in individual investment tutoring sessions, and better than 9 out of 10 of them have said that they have much more trouble with exits than with entries. In my opinion, exits are much more important than entries for consistent trading success.

Locating and getting into a trade is relatively easy, however getting out can be very tricky. To the downside, you have to admit that you were wrong, and take your lumps before they become bigger. To the upside, you have to risk leaving potential big profits on the table and get out without pushing your luck too far. By setting your loss parameters prior to entering the trade you can eliminate some of the tough decisions that are certain to present themselves once in the trade.

Below I am going to detail a few suggestions for setting – and maintaining various stop losses to help with exiting a trade for maximum profits while minimizing risk. Some of these are fairly simple and commonplace, others are a bit more complicated. The suggestions below are referring to a long position traded on daily bars ... consider the logic reversed (and sometimes speeded up a bit) for shorts:

1) Never lower the stop, once set.
2) Re-evaluate your stop loss daily, raising it to lock in profits whenever there is a valid point of support (Moving average, trendline, price support, etc) that it can be placed under.
3) Calculate the stop-loss percentage based on average volatility (daily trading range) and company fundamentals)
4) Check your stocks every morning at the open just in case something gaps below your stop.
5) Tighten the stop loss for the volatility as trade progresses, using the previous days trading range as a parameter.
6) Depending on position size, it can be a good idea to set a few different stops with a few different prices, so you can scale out of the trade.
7) In general, it is better to set alerts rather than hard orders (if you are available, and have the conviction to hit the “sell” button when the alert hits - I do know people who won’t).

Here's an example, using CELG. Lets say that we bought on a break of the 50 day simple moving average (orange line) on 6/25, with an initial stop below price support at $58.85 or so, where we saw it bounce a few times in May & June. This gives it a few areas of support to bounce if it does pull back, and leaves us with a relatively small, roughly 5% loss to the downside if we are wrong.

We can see the stock rose nicely in the three days following our buy point. Once a cushion on the trade has been established, we can raise our stop to just below the 50 day moving average, which gives up a few moving averages as support, and now our downside risk is next to nothing. On 7/1, we saw a big gap up and an 8.44% gain on the day. At that point, one could raise the stop, either to under the 7/1 intraday low, or below the 10 day moving average (white line), or both. This is an example of how raising the stop as you go can lock in profits while reducing downside risk.

Charts Courtesy of Worden Bros Inc.

Much can be, and has been said about all of these concepts elsewhere, along with extensive discussions on choosing an appropriate position size, which is in essence a close cousin to the concepts above.

This is just an overview, suggestions and observations, but that's part of the point. Everything is subjective, and everything can and should be modified to fit with what is comfprtable for YOU! These are simply things I have noticed over the years in my own trading and in talking to a whole lot of individual traders and investors… hopefully you will use some of these suggestions as a starting point and create something that fits in with your own trading style, and make you a better trader as a result. There are various ways to win in this game.

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Until next time, happy trading