Protective Stops while Day Trading

In learning how to trade, the first thing you need to know are the basics. These include recognizing the basic trend in a stock, the basic long and short setups, when to enter a trade based on the daily setup and where to place stops. Once you know these, one of the next steps is to learn how to protect profits and limit losses by adjusting your stops using trailing stops. There are several trailing stops that we commonly use. They can be combined and different situations favor different stops.

The Original Stop

Our original stop for a buy is just below the previous day's low by 1/8-3/16 and vice versa for a short. If this price is just off a whole number we will place our stop 1/8 on the far side of the price. For example, let's say we are looking to buy a stock at 40 1/8 and the previous day's low is 38 1/8 we would place our stop at 37 7/8 because the whole number 38 will serve as support. We place it 1/8 below that whole number because it can often break it by 1/16 by people that get too antsy, but it typically breaking it by 1/8 will signify that the break it real.

The other original stop used is most commonly employed in the event of a gap past your original entry point where you use a 30 minute rule to enter a stock. In cases such as a buy, where the stock gapped up 1/4 above our buy price and we entered it when it broke the 30 minute high, we will most often use 1/8-1/4 below the established day's low at the time the stock sets up as the stop.

Make sure you adjust the 1/8-3/16 amount according to the price and volatility of the stock. To a stock over $200/share, 1/8 is nothing so you want to place your stop lower than 1/8-3/16 under the previous day's low (or current day's low.) In this case $1 would be more reasonable. Similarly, in more volatile stocks you also want to place your stops a bit further away.