«To Use or Not to Use?»
A stop loss is a predetermined exit point to limit loss and define risk. The techniques for stop loss placement vary, but there is a common theme. You should exit when your original trade thesis gets invalidated.
For instance, many stop losses for bull trades are placed beneath support, reasoning that if support breaks, the reason for owning the stock is no longer valid. This is undoubtedly true if you’re buying a stock because it’s in an uptrend. If prices breach support, the uptrend ends, so why would you stay in?
Stop losses are most important for short-term traders betting on a particular chart pattern and those making large bets.
But if you’re making a small, defined risk bet, you may not need a stop loss. For instance, buying a bull call spread for $100. The risk is limited to $100 even if the stock goes to zero. Another situation where a stop may be counterproductive is with a long-term investment that represents a small percentage of your portfolio.
Trading for Beginners: Gino’s Gems
Check out yesterday’s Gino Gems!
Chart of the Day: Freeport McMoran (FCX)
Monday’s nasty intraday selloff created many bearish reversal candles. FCX has an ugly combination of being short-term overbought with a shooting star/inverted hammer candle.
Today’s line up
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