Setting Up Stop Loss Orders
Stop loss order levels should be in fact consistent, else they will cost you money. Self-assertive levels are liable to be initiated by the ordinary cycle.
Base your stop losses on specialized levels, for example,
- Support/resistance levels,
- Above and/or below the latest peak/trough,
- Above and/or below reversal signals; or
- At the intersection of moving averages.
Example
This example represents the use of 2 diverse specialized levels for stop losses:
The primary stop loss is set just below the level of the latest trough.
The second stop-loss is put below the support line (on a reversal signal above the support line).
Backing and Resistance Levels
Avoid from setting your stop loss precisely at the support or resistance level for two reasons:
1. Trends regularly switch at these levels and you might be stopped out superfluously;
2. A large number of stops might be set at the support or resistance level, particularly where it has framed at a round number.
Rather set your stop loss one or two ticks below a support level or one or two ticks above a resistance level. For instance: If a support level has shaped at $20.00, set the stop loss at $19.90 so that you are only stopped out if the support level is penetrated.
