Short Trading Strategy
What would be a good stock trading strategy for using a Trailing Stop ?
Want to trade stocks short-term (online) and need advice from successful traders. Thanks for your time and advice!
Obviously you need to figure out where to place the stop initially before it starts trailing. There are a couple choices -
1. Select a price some stop loss % (2, 3, 4, 5% – whatever you’re comfortable with) or
2. Base your initial stop on a support level.
Method 2 is what is normally used in Forex trading. In stocks I use mental stops as opposed to actually placing the order but I’m reviewing my charts a couple times a day so I know where my stop-loss is at and I have access to a computer all day. The concept is that if a stock starts to drop it will tend to halt its decline at a support level, at least temporarily. If support holds, price will bounce off of it and start rising again. If support breaks down, price will likely continue to fall. Price will probe the support and go below it temporarily then rise back to or above it while it is testing support so you want to have your initial stop at some tolerance below the support level.
Here’s an example of how to set the initial stop -
Refer to the following chart:
http://stockcharts.com/h-sc/ui?s=NTO&p=D&yr=0&mn=10&dy=0&id=p52292255501&a=74443331&listNum=25
Once you decide on a stock, determine the support/resistance levels as shown by the horizontal red/green lines. Near todays action there is support/resistance at these prices:
3.92, 4.00 (natural), 4.19, 4.40, 4.61
Let’s say you wanted to buy at 4.15 on Wednesday. There is natural support (even dollar amount) at 4.00 and 3.92.
1. Determine what your loss tolerance is – let’s say 5%
2. Determine how much tolerance below the support level you want to be ~ 2%
3. Determine where 2% is below support – 4.00 minus (4.00 * 2%) = 3.92
4. 3.92 would be your stop.
5. Determine how much of a loss you would take if stopped out – about 5.5 %
6. Determine if 5.5% is within your loss limit. If so, you would place the stop at 3.92 and if not, you have to decide whether to move the stop closer to support (increases the risk of getting stopped out) or not make the trade.
Once prices starts moving up, you have the choice of changing the stop to a trailing stop or to calculate a new support minus 2% stop price and manually change the stop.
All this may sound like more work than you want to do but after you do it 5-6 times, you will start to recognize the stop prices in a glance.
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