Stop losses can be very useful in preserving capital and cutting losers short.  It is critical to place the stop loss strategically.  If placed too tightly, the stock may move down and “pick off” your stop loss only to quickly move back up without you.  On the other hand, a stop loss placed too loosely can result in a large loss. 

So where do you place the stop loss?  The following is criteria that you may want to consider.

1)      Look for a confluence of indicators that can collectively confirm a support level (resistance if shorting the market)

2)      The indicators that you could consider are Trend Lines, Major Moving Averages, Fibonacci Levels, Chart Patterns, Candlestick Patterns, Bollinger Bands, Round Numbers, MACD,RSI and Stochastics.

3)      When a preponderance of evidence indicates that there is strong support/resistance at a certain level, then place the stop just below/above that area.  As covered in last week’s commentary, the stop loss margin will dictate the number of shares/options that you buy in order to keep your risk constant.

After the initial trade becomes successful and has not triggered the initial stop, then you should consider scaling out of a portion of the position at a defined percentage gain and placing a trailing stop on the balance of the trade.  We will discuss trailing stops next week.  Best, Robin

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