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Use a Volatility Based or Volatility Adjusted Stop LossVolatility based or volatility adjusted stop loss placement strategies & systems can cut premature and unnecessary sales. How do you set a stop loss so the stock can wiggle as it rises? Volatility adjusting methods & procedures enable you to do that. We think they are best when there are no obvious regions of support to use as a reference. They are far better than using a straight percentage (you're guessing and probably inviting more loss than necessary or causing an unnecessary sale) or simply "eyeballing" it. They can allow just enough "wiggle room" so the stop won't be triggered by normal "noise" as the stock works its way to higher price levels. . Experienced traders make it a rule to always enter a stop-loss order whenever they take a position. That's because they have learned the lessons of the market. They have learned not to invest or trade without a "safety net." It is the way they draw a line in the sand and say "this much of a drop I can tolerate, but no more." With a stop loss in place, the trader can be on a fishing trip or otherwise occupied and if the stock plunges or even if it falls more than it "should," once the stock hits the stop price, the order converts to a "sell-at-the-market" order and the stock is immediately sold at whatever the current market price is. To place a stop loss order a trader might say to his broker, "I would like a sell stop order for 286 shares of ABC at $X." "Sell stop" is the technically correct term. However, the broker knows that you really mean "sell stop" when you say "stop loss" so either expression usually okay. The order is usually good for a limited time or it is "GTC" (Good-Till-Canceled). "At-the-market" orders are usually preferred over "limit" orders because a limit order can result in your not selling at all, but most people will want out of the position most of the time if the stop price is reached. How does one determine where to put it? A stop-loss order can cause you to sell prematurely if you put it too close. On the other hand, a stop loss that is too far away will not offer much protection. Traders and investors will usually set their stop loss somewhat below a price where the stock is likely to get support. If the stock "bounces" every time it drops to $47, that means there is support at $47. A trendline is also a region of support. If a stock is in a rising trend, and the trendline defining its rise is at $39, a trader might therefore set the his stop loss order at $38. A stop loss could also be based on a drop of a certain percentage or on a drop that is beyond the normal fluctuation range or volatility of the stock (we'll come back to this approach later). There is no knowledge in the market about where you buy a stock. The stock does not "care" what you paid or what percentage drop you think would be a good selling point. If a stock falls X% below your purchase price, it means absolutely nothing to the market. The market is much more interested in its own patterns. For example, on 1-3-08 support for Valero (VLO) was at about $68.05. During the following 20 days, the stock dropped to $47.80. If a volatility based stop loss order were used, it could reasonably have been placed at about $67.75. Such a stop would have saved the investor from having a loss of more than 29%. The stop loss would have triggered an automatic sell order "at the market" when the stock fell to $67.75. The stock did hit that price and then it continued to drop. Obviously, the stop-loss order would have protected asset value. It must be acknowledged, though, that even if the stop loss were placed at $67.75, the stock may not have been sold at that price. Remember that the stop loss becomes a "market order" when the stock falls to the trigger price. The order would then be executed at the best price available for the next transaction. A frightening news item might be released that causes the stock to gap down from above to well below the price of your stop loss order. If that happens, your stock will be sold at the next available price below the gap. Click here for more on stop losses . Links To Other Places On This Web Site Stop Losses Stops Products The Valuator StockAlerts Trading Tools About Us Contact Us Fees & Refunds Links Index . All pages on this Web site are protected by copyright Copyright 2010 by Stock Disciplines, LLC No part of this publication may be reproduced or distributed in any form by any means. .
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"But thou shalt remember the Lord thy God: for it is he that giveth thee power to get wealth." Deut. 8:18
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