Set Your Stop-Loss
Determining stop-loss point placement is all about targeting an allowable risk threshold. This price should be strategically derived with the intention of limiting loss. For example, if a stock is purchased at $60 and the stop-loss is placed at $48, the stop-loss is limiting downside capture to 20% of the original position. If the 20% threshold is where you are comfortable, place a trailing stop-loss.
Stop-Loss Placement Methods
There are plenty of theories on stop-loss placement. Some players use universal placements which is 6% trailing stops on all securities and some theories use security or pattern-specific placements including average true range percentage stops. Common methods include the percentage method described above, the support method (which involves hard stops at a set price) and the moving average method (in which stop-losses are placed just below a longer-term moving average price).
Traders often employ a multiple-day high/low method, in which stops are placed at the low price of a pre-determined day’s trading. For example, lows might consistently be re-placed at the two-day low. More patient traders might use indicator stops based on larger trend analysis. Indicator stops are often coupled with other technical indicators, such as the relative strength index (RSI).
The Bottom Line
Traders should evaluate their own risk tolerances to determine stop-loss placements. Specific markets or securities should be studied to understand whether retracements are common. Retracements are temporary price reversals that take place within a larger trend. Securities that show retracements require a more active stop-loss and re-entry strategy. Stop-losses are a form of profit capturing and risk management, but they do not guarantee profitability.
Source:
https://www.thebalance.com/how-to-calculate-the-size-of-a-stop-loss-when-trading-1031386
https://www.investopedia.com/articles/trading/06/stopplacement.asp
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