Question:
I have two questions. 1) On what should a stop be based, support levels? 2) My buy order has “market,” “limit,” and “stop.” Do I place the stop along with the market order?
David
Answer:
David, support levels are certainly one way to place stops, along with resistance, high/low pricing, and percentage profit/loss targets. Really, the decision is yours to make, and should be done with an eye on your capital account, on the profit you want to make, and the loss you can absorb.
Again, the choice to place your stops when you execute an order is yours to make, but one thing to consider is that you are unprotected on the downside until you do place your stop. I have recommended placing stops immediately when executing a trade to protect on the downside. I find this to be the most habitual way of making sure one actually is protected. As well, once you place your stop on the downside, do not remove it, no matter how you “feel.” You might get stopped out early a time or two, but don’t worry. In time, you will learn just how far from your entry you need to place your stop to avoid getting stopped out early.
As to the upside stop, this is much more fluid. One should always define a profit target and set a stop to reflect that, but one can change the stop for a few reasons, not the least of which is that sometimes a trade will run, and when it does, you want to take advantage of that movement. Another might be to tighten your stop as you close in on profit to minimize your potential loss.
No matter how or why you do it, keep in mind using stops is the surest way to minimize losses and maximize profits.
Trade in the day; invest in your life …
