Stop Loss Placement

Once we see a market reversal and we take a position we need to protect our investment from loss. I will be discussing stop loss placement in a series in the coming days to illustrate the different kinds of stop loss methods available. Keep in mind the trend is your friend until the end when it bends. Personally I need something that is easy to follow and a set of written rules to be my guide. I am developing software for this purpose which I will make available.

Coincidentally, I am in a group of friends that gets together about once a month to have a desert and discuss a movie that we decide to see individually and meet later to talk about. This next Saturday we will get together at one friends house to discuss the movie Stop Loss and have a desert called ‘Death by Chocolate.’ I will keep you posted.

The chart below shows a series of higher highs and higher lows, which is the definition of an uptrend. It is coming from an extended period of time in which we have had a downtrend. I believe the market bottomed the week of March 17, at least for the short term. This is the 20 day 4 hour chart. I have marked the preceeding two lows. When price goes above the most recent high to form a new high the stop placement will move from the prior low to the most recent low. This is one method of where to place a stop. Click on chart to enlarge.