This is a subject of great debate and how to effect a stop loss strategy can be quite a nightmare for some. One of the worst things that happen with stop loss is getting stopped out and then the trade turning back the way it was expected to go. This is not the worst as you will probably ignore stop loss in the next trade and it will carry on falling.
This is exactly why stop loss has to be addressed properly and why you should understand how to use stop loss. Many traders use it without fail others don’t use it at all but most traders allow emotions to take over and this obviously does not work. You will have to remove all emotion and think like a robot to make stop loss strategy work for you. Watch the video and see what is best for you but I prefer to work with support and resistance or a simple percentage loss.
The first thing you should do is calculate the amount of risk you are willing to take on your portfolio and calculate that into your trade. So if you are willing to risk 5000 of your portfolio work out how many shares you can buy on your stop loss to carry that risk.
My Simple formula is as follows: In any currency.
Price of share = 225
stop loss = 220
Risk per share = 5
portfolio risk assessed is 5000
5000/5 = 1000 shares at 225 = 225000
Loss risk 5000
As you can see I used a very easy example with a small amount to ensure you understand it clearly but if you become used to this formula it becomes very easy to work with. I don’t recommend auto stop loss as it will cause losses when spikes occur so if you do have the time rather use a manual stop loss and include possible slippage due to manual handling. You will also get slippage with auto trades as they usually trade as soon as they can and if the price is moving fast it will drop past the stop loss. If you have assessed your risk at 10000 on your portfolio for the trade rather put your stop loss at 8000 or 9000 allowing you that extra slippage room for mistakes. Slippage can also be caused by emotion not just mechanical mistakes or movements so if you have decided on a limit try as hard as possible to stick to it.
via: Stop loss strategies explained – Stock Market Trading
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