When It Comes to Setting Stops, There Is No Set Rule

When it comes to setting stops, there is no set rule. They are a little bit of art, science, and personal preference, states TG Watkins of Simpler Trading.

They are the one thing that I feel like I am guessing at most of the time. With all of that said, however, they shouldn’t be overly complicated as they are for safety and you can always get back in.

The idea of a stop is to save your account in case of some drastic event, either in an individual name or in the market overall. Things can happen quickly in the market so I like to have the peace of mind that I have an automatic function that will get me out when things go south. 

The other purpose of a stop is to indicate you were wrong about the outcome of a setup. This is perfectly acceptable and happens all the time. As humans, we can talk ourselves into anything, especially when money is on the line and we are losing. When a trade starts to fade against us, we can tell ourselves that it will turn around soon and keep giving it more and more rope. Eventually, the position is against us so much that we finally have to throw in the towel and admit defeat, at a much deeper level than what our stop originally was. 

My dad would always tell me “your first loss is usually your best loss.” What this means is that you should just take the hit when your stop triggers, or the position goes against you. Otherwise, we hem and haw over it, making the loss worse and worse. Just take the stop and move on.

Other than the Moxie Indicator, my trading revolves around moving averages. They work well for me and are fairly reliable. Therefore, I tend to set my stop just below certain MA’s when I enter a trade. I usually want to see price hold a certain MA that I have identified as support, so if price can’t hold it, then I am out. Pretty straight forward.

But you can also set stops based on time. Since time is a factor in trading (we could be putting our money to work more efficiently elsewhere) if a stock doesn’t do what you want it to do within a certain window of time, consider leaving it for a more energetic name. No sense wasting efforts on something that isn’t rewarding you.

Overall, stops are not perfect. I get hit all the time. They are there to make sure things don’t get worse and act as a safety valve. Sometimes I set them too tight, sometimes there are crazy moves in the market that tag my stop, only to reverse and take off. It’s part of the game. Don’t let a stop getting hit affect your confidence. It’s like wearing protective gear in football.

TG Watkins is the director of stocks at Simpler Trading.