Setting a good stop is essential for risk management. Not too many people understand how to do that properly. So I’m gonna take a stab at it and hope you can benefit from it.
Stop LossStockCharts.com Definition
An instruction to the broker to buy or sell stock when it trades beyond a specified price. They serve to either protect your profits or limit your losses.
What is it for?
To protect your profits or limit your losses.
Setting Stop On Distribution
Here is a sample of a distribution play. We recognize the toppiness as a sign of distribution. This toppiness demarcates the resistance and our entry price range for our play. So we want to short. The median box highlights potentially good entry zone, along with the resistance price level. Isn’t the market very nice.
Identifying the stop price
The yellow line spots the stop for us at 1096 on GC this fine 8:33 am est. Why do we choose 1096 as our stop? The logic is very simple. At 5:36 am est, it is 1096 support that we lost that allowed us to move down. So this retest of that lost support is now resistance. If we close above it, then we will move higher.
Setting A Stop On Accumulation
Here is a sample of an accumulation play. As you can see we have candles moving sideways, demarcating our median price range for our entry, including the support price. See how cooperative the market is on showing you an opportunity?
Identifying the stop price
We will consider 1104.75 as our stop price. Because at 10:07 am est, we sold off at this price level and when we closed above it at 10:28 am est, the price moved up. Simple logical way of identifying your stops.
Playing spots of Accumulation and Distribution provides you safe entries. The candles help you identify your entry and your stops. All you have to decide is which way it will go. Is it a scalp or a longer-term play. Scalps says, your target is conservative and tight. Longer term, suggest you have confirmation on higher timeframes that the move will be larger and that is where you will get your target exit price from.
As you notice these charts are on my tick charts, the same process is consistent on higher timeframes. So be comforted that the technicals are the same on any timeframes.
Protecting your capital and your profits is good risk management allowing you to continue trading. As usual, everything you need for a good play is in the charts.
[…] covered some general instructions on setting stops before. Issue 014 – Setting Stops. It was just amusing listening to the comics in the chat room and seeing how many clueless people […]