{"id":23876,"date":"2013-02-07T07:30:26","date_gmt":"2013-02-07T12:30:26","guid":{"rendered":"http:\/\/www.smbtraining.com\/blog\/?p=23876"},"modified":"2023-04-25T17:51:41","modified_gmt":"2023-04-25T21:51:41","slug":"placing-your-stops-correctly","status":"publish","type":"post","link":"https:\/\/www.smbtraining.com\/blog\/placing-your-stops-correctly","title":{"rendered":"Placing Your Stops Correctly"},"content":{"rendered":"

If you become skilled at stop placements your win rate increases. It\u2019s a skill that we teach traders on our desk but it is something that takes live trading experience to ingrain in a trader\u2019s brain. Newb traders are all over the place in this area. You have some who will risk a few cents, which is awful in an HFT market, and there are those on the other side of the spectrum who think \u201cif I just gave it some more room it would have worked\u201d.<\/p>\n

Two things you have to realize when placing a stop: 1) they shouldn’t\u00a0be randomly placed at a predetermined distance from your entry and 2) once you figure out the correct stop for a given setup you have to calculate whether the profit target is sufficient to justify the amount of risk the trade requires—risk\/reward ratio.<\/p>\n

Let\u2019s take a look at two trade ideas from today. The first was in MHP. This was a third day play. It continued to show weakness on the Open so I wanted to initiate a quarter short position. After immediately filling its higher gap in the first few minutes it quickly spiked higher before resuming its downward price action. I used the top of the spike at 45.23 as a reference to initiate my position. I placed an offer at 45.10 while it was trading around 44.90. As soon as the 45 offer lifted it spiked higher and my offer was taken for the initial short. I placed my stop at 45.26.<\/p>\n

The risk on this trade was probably around 20 cents if you factor in about 4 cents of potential slippage on my stop. I thought the potential upside was at least to 43.75 where it had bottomed the prior day so reward of $1.35 or more, so a risk\/reward of better than 1:5, which is what we look for in our setups.<\/p>\n

\"\"<\/a><\/p>\n

The next trade idea was in BIDU which was a second day play. BIDU had gapped lower on earnings the prior day and on the Open started to trade lower and I initiated a short position below a 96.70 seller. Eventually I was stopped out when it spike above 96.75. This failure to test the prior day\u2019s support area at 95.50 caught my attention. I also saw a lot of buying on the way down the prior day starting at 98.50. Those factors in addition to the overall strength in the market recently got me to focus on a possible long setup.<\/p>\n

So when BIDU started to hold above 97 I shared my thoughts on StockTwits that it looked like it was bottoming. I had a good reference point at 96.70 where I had initiated my short earlier and I had an upside target to the prior day\u2019s Open of 99. There could be some trouble at 97.75 as it failed at that level two days in a row so it wasn\u2019t an A setup, but there were enough checks to start nibbling the longer it held above 97. That is what it did so I shared the trade idea on SMB Real Time<\/a> with the correct stop.<\/p>\n

It turned out that this setup never came close to testing the 96.70 support and trended all the way to 99. The risk\/reward for the trade was better than 1:5 with 35 cents of risk for upside of $2, but that 97.75 resistance made the profit target a lower probability so it wasn’t a trade to load up.<\/p>\n

\"\"<\/a><\/p>\n

\"\"<\/a><\/p>\n

Steven Spencer is the co-founder of SMB Capital and SMB University and has traded professionally for 16 years. His email is sspencer@smbcap.com.<\/p>\n

No relevant positions<\/p>\n","protected":false},"excerpt":{"rendered":"

If you become skilled at stop placements your win rate increases. It\u2019s a skill that we teach traders on our desk but it is something that takes live trading experience to ingrain in a trader\u2019s brain. Newb traders are all over the place in this area. You have some who will risk a few cents, which is awful in an … Read More<\/a><\/p>\n","protected":false},"author":143,"featured_media":23881,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[8,456],"tags":[],"class_list":["post-23876","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-steven_spencer_steves_blogs","category-trader_development"],"yoast_head":"\nPlacing Your Stops Correctly | SMB Training<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.smbtraining.com\/blog\/placing-your-stops-correctly\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Placing Your Stops Correctly | SMB Training\" \/>\n<meta property=\"og:description\" content=\"If you become skilled at stop placements your win rate increases. It\u2019s a skill that we teach traders on our desk but it is something that takes live trading experience to ingrain in a trader\u2019s brain. Newb traders are all over the place in this area. You have some who will risk a few cents, which is awful in an ... 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