Protective Stops while Day Trading - Part 3
Trailing Stops
The other types of stops are the
ones we call trailing stops and these are designed to protect profits while
maximizing potential. We will discuss these in terms of a buy, just use
the opposite when dealing with a short. One of various trailing stops we
use, is a break in the 15 minute 20 simple moving average.
This means that when an entire candlestick bar trades on the other side
of the 20 ma and closes there, that closing price is the price where we
initiate our stop. Another is using the 20 ma on the 5 min chart which
is used in the same way but for different reasons. Mainly this is used
after large moves and in uncertain markets. This can also be used to take
partial profits while keeping a stop on the rest of your shares just below
the day's established low. Another potential trailing stop is a break
in an intraday consolidation by 1/8 or so in the opposite direction I want
to stock to go. Again, adjust this 1/8 according to price and volatility.
The final trailing stop is one we use on a daily and that is a break under
the previous day's low. This is used most comonly after several days
of higher highs or in more volatile markets.
These are the types of stops we typically
use and although there are other possibilities always base your stops on
reasons you can back up with logic. Never stop out of a trade just because
you "got bored" or "scared" or "just didn't want to take that much of a
loss." Your original stop should already have taken into account
how much you could loose and what an acceptable stop was (i.e. 0.5-2% of
your account,) so any other stops should never risk more than your original
stop. Over and over again, we see people exit a position just 1/8-1/4
before it turns around in what would've been their favor. We have
even seen them get out at the exact low because they panicked. Hopefully
this discussion will dramatically reduce your changes of making the same
blunder, or at least of repeating it.