How to place Stop Loss in Trading?

When markets are

• Volatile
• Overbought in Short Term
• May Reverse from the current trend as per technical

Most common term used by traders/analyst is

Tighten your Stop Loss/Use Trailing Stop Loss

Stop loss order is an order to close position if/when losses reaches a particular point. In other words this is an order by which you can decide the maximum loss that you are ready to accept. Here we are going to discuss only Stop Loss Order regarding Day Trading, but the same principle can be used for Swing Trading or Long Term Trading.

How should one implement  to ‘Use Trailing Stop Loss ‘ ?

The  is to reduce the risk and/or lock-in profits. As we hold a position over time and the paper profits begin to build, we periodically adjust the Stops to lock a larger percentage of our gains as time passes by. By tightening the Stops, we reduce the risk of incurring losses – reduce the risk of allowing profits to slip away.

Implementation

If you have a Buy (long) position

1. Identify the nearest support level. This can be a Pivot Low, or a consolidation. Put your stop just below the support.
2. Calculate the 5 period Exponential moving average. Your stop should be moved just below the average.
3. Locate a Fibonacci retracement of the nearest up swing. Keep a stop at 50% retracement of this up move. If the 50% is far away, then use the 38% retracement, or even 23% if neccessary.

4. Keep an eye on volumes if it is not huge on correction you can hold the stock.

If you have a Sell (short) position

1. Identify the nearest resistance level. This can be a Pivot High, or a consolidation. Put your stop just above the resistance.
2. Calculate the 8 or 13 period moving average. Your stop should be moved just above the average. If you really want to tighten, then use a 5 period average.
3. Locate a Fibonacci retracement of the nearest down swing. Keep a stop at 50% retracement of this dowbn move. If the 50% is far away, then use the 38% retracement, or even 23% if neccessary.

4. Keep an eye on volumes on upside.

Discipline

Once a stop is installed, it cannot be moved lower for a buy and higher for a sell. Stops for buy positions can only be moved higher, while stops for short positions can only be moved lower.