And its Alternatives
Traders,
Stop losses are used to mitigate risk and avoid unnecessarily large drawdowns. Using them seems smart and entirely appropriate. But the devil is in the details.
Where do you place your stop order? And how do you avoid getting whipped out of a trade prematurely?
The answer to the first query is – it depends. For bullish plays, traders typically place their stop loss below a major support zone. And, if you entered the trade based on a specific chart pattern, then your stop loss should be placed at the level that would invalidate the original pattern if broken. In other words, when your reason for entering the trade is no longer valid – then exit.
Unfortunately, even the most well-placed stop losses will occasionally get tripped, only to see the stock push back in the right direction.
If you’re struggling with making stop losses work for you and are open to alternatives, I have two ideas for you to explore.
First, try using limited risk options trades where you’re willing to incur the max loss. That way, you don’t need a stop.
Second, purchase few enough shares where you could ride the stock to zero. Admittedly, this would be most appropriate for long-term investments versus short-term trades.
I covered these topics in greater detail in last week’s Options Theory blog video.
#TeamTackle
Chart of the Day
MSFT High Base Breakout
Microsoft (MSFT) just broke out of a classic high base pattern. If you triggered in on the $290 resistance break, where would you put your stop loss? |
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Video of the day
Jedi Options
Coach Tyler uses the setup on Advanced Micro Devices $AMD to analyze a potential Bull Call Spread or Bull Put Spread in this clip from Wednesday’s Halftime Report
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