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Stop Loss Metrics

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Let’s talk about your stop. There’s 2 STOPS to consider, the most important being your stop loss.  It’s important because it defines your risk.  But again there are 2 stops…

  1. Stop Loss (Protective Stop)
  2. Moving Stop

In this article lets master your STOP LOSS shall we?

Ideally we set a stop loss based on swing structure because we know swing structure will “hold true” if the trend stays intact, AND such a stop isn’t likely to kick us out of the trade!

HOWEVER, if such a stop adds too much risk to the trade you have to adjust RISK.

There two ways to adjust your risk…

  1. Move your stop OR
  2. Allocate less to the trade.

Let’s get into an example trade so you can see what I mean. I’m going to use options for my example, which will lead to more questions I’m sure that I’ll actually address in a later article.

Take a look at the following image.  On the left is offered a solid Dead Simple Swing Trading entry right near the recent swing low.

Price jumps up past our green 21 EMA right after near perfect swing compliance and our RED is UP! A perfect DSST Trade as discussed here. 

Entry at $125 and a STOP at $116. ($7 dollars in risk.)

On the right would be an example of a late trade where using the swing low as a stop might be more risky than were willing to take, let’s examine both.

AGAIN, using a swing low in an uptrend for your stop is ideal because if swing structure stays “Bullishly Intact” this should provide almost a barrier between your entry and your stop.  Many times this area becomes strong support, again ideal!

On the right let’s pretend that this is what’s offered, its much further away from the prior swing low, its more prone to retrace because it’s a little extended. The question becomes, are you willing to let price move down against you that much

Either entry CAN be fine but you must examine and establish RISK.

ALWAYS REMEMBER: Risk is the only thing you have complete control over.  It’s how you’ll make your money – never forget it.

As a pre-cursor: When it comes to determining risk with options we use DELTA to figure risk.  If the DELTA on an option is .50, it means every $1.00 move on the chart is a .50 cent move on your premium. (Up or down.)

Let’s go over the options on both.

Here we have the following metrics.
1. Entry $123
2. Stop Loss $116
3, Option Premium $2.70
4. Delta .35
5. STOP $7
6. 90% Loss

So if we reach our stop, that’s a $7.00 move against us, if my Delta is .35 that means my premium will go down .35 x $7 = $2.45

A $2.45 hit on $2.70 leaves me with .25 cents…

My $270 is now worth just $25 a LOSS of 90%+
My $2,700 would shrink to $250

NOT GOOD!

Let’s look at B…

Here we have the following metrics.
1. Entry $130
2. Stop Loss $116
3. Option Premium $3.60
4. Delta .45
5. STOP $14
6. 100% Loss

So if we reach our stop, that’s a $14.00 move, if my Delta is .45 that means my premium will go down by – .45 x $14 = $6.30

That’s a 100% loss! It will take my premium to nearly ZERO, it will hold some value as it still has time left but its basically a 100% loss

As you can see BOTH are BIG losses, but consider this…

YES, if I put up $1,000 today and my stop got hit tomorrow and I was down 90% or 100% that would BLOW!

But, if I had only $50, or $100 allocated to the trade, all the sudden it’s not so bad now right? This is all relative as well.

See how we can manage risk by allocating less?

See how it doesn’t really matter what % loss is at stake if we determine in advance and allocate properly?

Now, you can never go BELOW a single contract with options, so in these examples $270 and $360 are the bare bones bottom we can get in for.

FYI: Every options contract has a 100 shares in it, and the minimum you can buy is ONE contract, so if the premium is $3 that = $300 for a single contract. ($3 x 100=$300)

So if we want to allocate less MONEY to a trade and we can’t achieve that at $3, we would need to focus on lower priced stocks like $24 to $50.  These will offer options at $.50 cents to $1.00 and therefore allow you to go all the way down to $50 per trade! (.50 x 100 = $50)

Now, because we CAN’T allocate less on B, we do have the option of simply moving our stop up higher.

What if we moved our STOP to $125, right below the low of the current long candlestick?

Its not perfect but it is the next best LOGICAL place that price “ought NOT” move below, IF the uptrend stays intact.

Always be considering trend and price thresholds – lines in the sand if you will.  Its very logical to assume that if the trend up is strong this candles low will not be violated.

HOWEVER, sometimes you just got to tighten up the stop NO MATTER WHAT!

In this case under the low if this candle just makes a lil sense.

Here you go…

NOW we have the following metrics…

  • Here we have the following metrics
    Entry $130
    2. Stop $125
    3. Option Premium $3.60
    4. Delta .45
    5. STOP $5
    6. 63% Loss

So if we reach our stop, that’s a $5 move, if my Delta is .45 that means my premium will go down by – .45 x $5 = $2.25

My $360 is down $2.25 to $$135. 

About a 63% loss

Personally I’m OK with risking $225 bucks for the potential gain at hand, but as you can see RISK can work for you or it can work against you.

NEVER just take blind risk always figure it out, make adjustments to how much you allocate, where you place your stop etc., and see if you can’t make it more favorable for YOU!

Lets recap…

1.Entry $123
2. Stop Loss $116
3, Option Premium $2.70
4. Delta .35
5. STOP $7
6. 90% Loss

  1. Entry $130
    2. Stop Loss $116
    3. Option Premium $3.60
    4. Delta .45
    5. STOP $14
    6. 100% Loss

1. Entry $130
2. Stop Loss $125
3. Option Premium $3.60
4. Delta .45
5. STOP $5
6. 63% Loss

Ass you can see you have OPTION when it comes to risk.  You can adjust risk by allocating more or less to the trade as well as moving your stop.  Swing structure placemnt of a stop is ideal, but doesn’t always work

Explore your STOP options!

See how I find my Dead Simple Swing Trades here.

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