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Protect your Dough
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Traders,
If you’re going to find success when actively trading, then you better familiarize yourself with the best practices of stop losses. Consider today’s message a primer on the topic.
Think of a stop loss as a predetermined exit point. It’s designed to get you out of a trade if the stock moves adversely. Usually at the beginning of a bullish trade, your stop loss is placed below a support level. Breaking support indicates a change in trend. It can also suggest the pattern that originally got you in the trade is failing.
For bullish stock trades, a stop loss is usually a sell stop order. It is placed below the current stock price and signals the broker to input a sell market order when/if the stock falls to the price specified in the order. For instance, if I own a stock at $100 and place a sell stop order at $95, then my broker will route a sell market order to exit the position once prices fall below $95.
Here’s the same explanation for how a stop loss would work with a short trade.
For bearish stock trades, a stop loss is usually a buy stop order. It is placed above the current stock price and signals the broker to input a buy market order when the stock rises to the price specified in the order. For instance, if I’m short a stock at $50 and place a buy stop order at $55, then my broker will route a buy market order to exit the position once prices rise above $55.
Smart traders input their stop loss at the beginning of a trade so they can calculate the risk per share. In the bullish example above where you bought stock at $100 and placed a stop at $95, your risk per share would be $5.
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Chart of the Day
Scouting Report Pick
Agnico Eagle Mines (AEM) made its way into our May 1st Options Report. It had a bull retracement pattern. The suggested (and most logical) stop loss was below the lowest bar of the pullback which defined support once the stock bounced on May 3rd.
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