The stock market is an environment that’s literally changing every second; it is completely random and there are very few variables you have control of. Two of these variables are when you enter and exit a trade. Fortunately, you can also control how much money you can lose, should things go wrong in a trade; this is called setting a stop loss.
“You actually have to master the loss aspect to trading before you can master the profit side.”
– Daryl Morse
Setting a ‘hard’ stop on your matrix is the best way to prevent extensive losses. For beginners, we recommend setting a “stop loss” exit point on a trade that doesn’t risk more than 1.5% – 3% of your total account size per trade. To further protect your account, it’s also smart to follow a max loss/week rule as well, but setting your stop on each trade is crucial to your success as a trader.
As far as where to set your stop exactly, there is no set rule and can be situation dependent. The key is finding that balance between a stop that isn’t too short, so your entry has room to work versus one that’s too large and cause you to lose too much money. Experience helps but this decision is often based around your risk tolerance level, account size and where your entry will be.
Here are a few general guidelines for setting a stop:
1. Try to put your stop below the support level if going long (expecting the price to increase) and above the resistance level if going short (expecting the price to decrease).
2. If you’re trading a candlestick pattern, the true stop should be above or below the pattern, depending on the direction of the trade.
3. Look at the Average True Range of a stock to judge how big your stop would need to be to not get chopped out.
Regardless of your risk tolerance, it’s absolutely crucial that the stop loss point you’ve chosen be respected on every trade! Don’t convince yourself that it’s OK to let the trade roll past your stop hoping things will turn around. If it reaches your stop, accept the loss and move on. Besides protecting your account from unnecessary losses during a trade, setting your stop ahead of time can also help you determine position size and also whether or not the trade is worth taking.
For more helpful tips and information about setting stops, check out the curriculum from our Limitless Volume Day Trading Course or watch it used by our traders during our day trading live stream! Sign up for a FREE 7-Day Trial and get immediate access to Lesson 1 here.
