Profit said: ↑
Generally, where do you add a stop loss? When I think about this, one of two choices come to mind:


1. Add a stop loss at a key price level, based on TA. Let's say I enter XYZ on the 200 day SMA bounce. I would add a stop loss a few cents (.05-.10) below the SMA. By the way, is there a rule to determine how many cents below the SMA I should add the stop loss?

2. Add a stop loss based on a fixed percentage. For example I enter XYZ at $100 and I set my stop loss at 2% of my entry price, which would be a $98 stop.


Personally, I think adding a stop loss based on TA at a key price level is much "smarter" than adding a stop loss based on an arbitrary percentage. For example, let's say I were to enter XYZ at $100 and assume it's consolidating between $95 and $105. If I were to add a 2% stop loss, I would be stopped out at $98 for a loss if XYZ were to plunge. However, let's say there was a 50 day SMA right below the $95 level, such as $94.90. If I were to add a stop loss at $94.80 and XYZ were to bounce off of the SMA, I wouldn't be stopped out and could wait for XYZ to touch $105 for a profit.

Which option is the better choice? Or is there something else that I'm missing entirely? Keep in mind that I only study TA as of now.
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The key to placing your initial stop loss is to place it where your pattern is broken. I would hold to this regardless of the kind of trader you are, so whether you're a day trader, a swing trader, a position trader, or an investor, you're more likely to also be a pattern trader (with very long term investors as a possible exception). Even if you trade channels, reversals, or simple trend continuation patters, there is some underlying pattern you're looking for in your setup.

Let's take a first simple retrace going long on a stock as an example. Once you have your initial impulse move to the upside followed by a smooth retracement back, you will find that if you have your cycle indicators properly set, you should be able to pretty accurately identify high probability cycle lows, and even if you find yourself caught up in a complex retrace that later confirms that what you thought was your cyce low wasn't, there is very high probability that your next cycle low is an a, b, c complex retrace (which are awesome to trade, I might add), assuming that you're in an established trend with at least some strength to the momentum with a confirmation on the higher time frame and no cluster of resistance overhead on your setup chart.

So, where is your stop placed? Exactly one tick below what you think is the cycle low. For example, if you believe the cycle low is exactly $8.56, then it's my firm belief that you should place your stop at exactly $8.55. Give it absolutely no room (well, no more than a single tick) to move below the cycle low. Remember, the cycle low is the lowest low in price between the previous and next cycle high, and if you're expecting an impulse move upwards in price after you've analyzed other usual and usually necessary elements in your trading methodology, then you would have absolutely no business being in the trade if what you thought was the cycle low wasn't the cycle low--at least that's the way it is with my trading methodology.