How to define a stop loss?

“Place your stops at a point that, if reached, will reasonably indicate that the trade is wrong, not at a point determined primarily by the maximum dollar amount you are willing to lose.”

Bruce Kovner

If you are using automated trading systems, the most appropriate approach for stop loss’ defining is applying Average True Range. For example you might use 1.5 times or 2 times 10 days ATR. It will depend on your trading horizon.

If you are proprietary trader (most likely trend follower), it is reasonable to put your stop loss 10-20 cents below major area of support. Again, the area of support would be defined by your investing horizon.

Honor your stops!

In high volatile environment (now), you would often be shaken out of positions, only to see them reverse back in the desired direction. This is not a reason not to honor your stop losses. It is just a reminder that either your timing was inappropriate or that you don’t have an edge in the current market environment and therefore you shouldn’t participate until things change. There are times to buy, there are times to sell, there are times to do nothing.

In bear market, honoring your stop loss will save you form disaster. It will assist you to preserve capital, so you could live to trade another day. In bull market, it will free out money for better trading opportunities.

The only reason to hold a stock in your portfolio is if you would buy it at its current level and there aren’t any better opportunities for your money.

We are experiencing a rare event of market destruction that will lay down the foundations for the greatest wealth-building opportunities in our life time.

After the darkest hour of the night, the sun will rise again.

Reason to buy

“If you really think the stock is going to make a big move – and that should be the only reason you are buying the stock to begin with – then there is no reason to haggle over an eighth of a point. Just buy the stock. The same thing applies to the downside; if you think the stock is going to drop, just sell it.”

David Ryan