Once upon a time there was a trader named Goldilocks. Her days were spent roaming the halls of Wall Street, reading charts, and deploying lots and lots of dough. One day she came across a sweet setup in Fiserv (FISV). ‘Twas a bull retracement boasting low risk and high reward. It beckoned to Goldilocks with promises of profits.
And Goldilocks responded.
Take a look at the price action in FISV to see if you too would have scooped up some shares.
Like a good little trader she placed her entry just above the prior day’s high. Such positioning ensured the price would be heading higher before she jumped aboard.
Then came the tricky part – stop placement. As with most traders the objective was to find that sweet spot; not too tight, not too loose, but juuuust right. While Goldie was surveying the chart she could hear her mentor’s voice echoing through the halls of memory, “remember, you should get stopped out of a trade when your reason for entering is no longer valid.” And, “Once the chart pattern has been rendered moot, head for the hills.”
Since the bull retracement pattern in FISV would have been invalidated on a break below the lowest day of the current pullback ($100.80), that is where Goldilocks was considering placing her stop. Could she place it below the previous support level at $96.37? Sure, but that would be too loose. It would take her risk per share unnecessarily high. The breach of $100.80 would also correspond with a break of the 20-day and 50-day moving average giving yet more reasons to jump ship. No need to wait until the $96 zone is breached. The retracement is officially broken below $100.80 so, again, bail.
What would be considered too tight in this scenario? Really, anything above the $100.80 level which is essentially the prior day’s low. You have to at least wait for the stock to take out the pivot, otherwise you’ll get shaken out on noise.
Here’s Goldilock’s recap:
- Too tight: $101 or higher
- Too loose: $96.37
- Juuuust right: $101.80
Another way to understand why the $96 level wouldn’t be ideal for a stop loss is because we typically use a break of the current support level to signal the bull retracement has failed, not a break of a previous support level. See below for illustration:
I’ve seen many a new trader come across my desk with an obsession on stop placement. And understandably so. They want to get it right! Here’s a dirty little secret. How low below support you place a stop loss is totally personal preference. Super tight and you have less risk, but a greater chance of getting whipped out. Really loose and you have less chance of whipsaw, but more risk per share.
Oh… and Goldilocks lived happily ever after:)
P.S. Credit for today’s post goes to DANAYABETHEA who posed a great question in response to my recent stock report. I leave you with a mystery which demands investigation. Readers must guess at the answer. And if you get it right, I’ll use my good will capital to curry favor with the Market Gods. They will shower you with love.
Ready for the question?
Is DANAYABETHEA a first name, last name, or both? And, if both, where does the first name end and the last name begin?
Go ahead. Impress me.
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