Stop loss for PJ.

  1. 473 Posts.
    Hi PJ,

    This dynamic % stop loss thingy is just a term I picked up in some mag and pretty much sums up what I have been doing over last couple of years.
    It's just a way of trading in a volatile market.

    Couple of assumptions;

    1) We are trading not investing.
    2) Market is highly volatile. (Does not really know where it is going.)
    3) You trade some speculative stocks from time to time or bluechips thru leveraged products.
    4) Stocks traded are liquid.
    5) You work from home or have access to regular market updates.

    ie. Pretty much current market and what a lot of posters are doing now.

    The buy decision has been made for whatever reasons.
    Once the buy has been excuted you ignore resistance levels completely. (On buying you have no idea what you will sell for.)

    What we are trying to avoid is selling too early into a trend that has legs.

    The whole idea is for for stop loss to track the share price up BUT at a slower rate, the theory being to protect yourself from selling into support levels.

    So we have brought into a trade and at the end of the day we have a buy confirmation in the mail and hopefully a stop loss that has not been triggered.
    We now recalculate our stop loss on a daily basis depending on the movement of the underlying eqiuty.
    If it has not moved or gone down we have the same stop loss, but if it has moved up we adjust our percentage stop to reflect % increase in eqiuty.
    day one - stop loss 3%
    day two - eqiuty has increased 1.5% therefore stop loss might now be 3.5% from new opening price.
    day three - the trade continues in your favour and therefore your stop will be something greater than 3.5%
    but less than increase in eqiuty and so on.
    (You do not need to use %'s , numbers are easier.)

    Might sound a bit complex but in practice pretty simple through experience and can do in your head.

    2 things though;
    You must be able to have the discipline to execute stop loss and you have to have time to track daily.

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