All language subtitles for 4. Stop-Loss Strategy Options. Types Of Stop-Loss For Technical Traders

Well, we know we need to use stop losses.

Now, let's talk about the different ways you can kind of set them up, the different types and the

might be a certain type that maybe calls to say, oh, that makes sense to me.

That's how I want to use it, use my stop loss order.

So there's different approaches to how to actually execute it.

And they're all really related.

As far as, again, trying to minimize losses and maybe maximize profits would be the ultimate way of

looking at them.

And so they're related.

So you could be using Senyor Stop losses based off indicators about the money you have invested for

a particular trade or the timing.

You might want to set a time frame as far as you'll want to stop loss.

And and the thing is, though, they're related, they're always meant they don't always match up.

Right.

They all serve their own individual purposes.

And so you want to choose an approach that works for you.

And if you find one approach isn't working or it's not working as well as you wanted to, just to adjust

it within that type of stop loss, that's just maybe, you know, help.

Let's say if you're looking at a time, maybe you're adjusting your time periods longer or shorter,

for example, or try one of the other approaches that we're going to learn about here so you can always

make adjustments to it, but you'll want to start thinking about it and start picking about one type

of stop loss that seems interesting to you.

They're all very valid.

They all are used and they're all very good in their own ways.

So let's take a look at these.

A famous stop loss rule as the two percent stop loss rule.

And it was popularized in the book The Way of the Turtle by Kurtis Faith.

It looked at taking amateurs and teaching them how to trade and using some rules around that.

So if you're interested in that, where the turtles are very interesting book.

And the idea of the two percent rule is you set a stop loss or you stop a loss when it reaches two percent

of your starting equity.

Think of your equity as your money.

What do you have totally available to trade?

Right.

So it could also be termed like you're trading equity or your investment capital.

Basically, it's the amount of money in total that you've set aside for trading into a whole bunch of

different trades.

So, for example, let's say you have ten thousand units, could be dollars rupee's.

Whatever your currency is, you have ten thousand starting equity.

So two percent of that would be two hundred.

So that's saying under the two percent stop loss rule you can afford to lose, you can afford to lose

and would set your stop loss at 200 on each trade.

Right.

So it's a two percent rule around that.

As far as your total equity.

Now, you might say to someone two hundred out of ten thousand doesn't sound like much.

Well, that also depends on how frequently you're trading.

Right?

So it doesn't sound like much, but if you're trading many securities over short time frames, it can

really add up fast, right?

I mean, so it's a real fast way that you can really kind of go through your equity if you don't put

in some stop losses around it.

And so that's where this two percent stop loss rule came from.

The book, The Way of the Turtle.

And you can probably see that this is a money stop.

Right?

So I'm using my stop based not on an indicator or anything.

I'm just using like he if I make a trade, I'm willing to lose two hundred.

That's it.

You know, after that, I'm out no matter what.

Another type of money stop is what's called a risk reward ratio, and it's really the relationship of

your expected gain versus your expected loss.

So the higher the risk reward ratio, the the more desirable the trade is.

Right.

So that's that's the idea about that.

And the use stop loss is around, you know, how risky, let's say, a particular risk reward ratio

might be.

So let's give us an example.

So, for example, let's say you have a security that's a fifty, right?

So you have the fifty.

And the indicators say the potential gain is to a price of seventy five.

Right.

You're looking for indicators.

You're looking at where it might go.

Indicators are saying, OK, or you feel you might make seventy five or get to the price, we'll get

the same five.

So you'd make twenty five.

Right.

So you'd make twenty five.

So you said your stop at a percentage below that initial price.

So let's say you're willing to lose twenty percent.

Right.

So you're going to lose twenty percent on each individual security trade which would be in this case

you're so you're not looking at overall equity, you're looking at individual trade, which may be a

whole different amount.

So in this one it'd be I'm willing to lose ten, ten dollars or ten units.

Right.

So I'm looking at that like buying a security of fifty.

Twenty percent of fifty is ten.

Right.

So that's that's what I'm selling my stock below that.

So if I'm buying at fifty my stop loss would be set at forty.

Right.

Fifty minus 10.

The amount I'm willing to lose, that's a percentage of the initial price.

In essence I'm willing to lose ten in order to make twenty five.

Right.

You see that how I'm thinking I'm going to get up to twenty five.

My indicators are showing that maybe there's a trading range that's kind of stylish that might show

that and I'm at the bottom of the range or near the bottom and I'm saying OK, I'm willing to invest

ten dollars.

Twenty five.

So the ratio, a reward risk reward ratio is is thus for a twenty five dollar or twenty five unit reward

for ten dollars at risk or two point five to one.

Right.

So if it was that.

Let's say 40 dollars or more to ten dollars and risk.

That would be four to one, right?

All right.

So you actually if you look closely, you might be saying, wow, that's actually backwards.

It should be called the reward risk ratio.

Right.

Because the first number is your reward number, I think because terms of risk reward is used in many

areas outside of trading as well.

That's why the use risk reward.

But technically, you're correct, it should really be called the risk reward risk ratio.

Nobody calls it that.

They all call it the risk reward.

So with this type of ratio, you want to be conservative a little bit and using this type of ratio and

emphasize the downside risk more than anything, you might want to say, OK, I'm not as willing to

lose as much, you know, especially getting started with it.

So you might want to make those numbers a little bit, you know, play around with them.

There's different things that could go higher.

You could go lower than 20 percent.

That's a big drop.

Maybe five percent would be the right number.

You know, those are all OK.

Or you can use them all the way to the turn a little bit.

You know, you're looking at two percent equity in the thing you can see from this.

It can be a little complex to calculate.

Right.

So so you have to kind of factor that in.

But if my risk to reward ratio or reward risk is a higher number, that means I've got higher potential

gain.

So maybe I'm willing to take a little bigger loss because the rewards are much higher, or maybe I'm

willing to invest a little bit more money because the rewards are higher, too, in comparison to the

risk.

So this is a way you're setting a stop.

You're still buying with the whole idea.

You want to hit that target profit, you still want to, you know, every trade to be profitable.

Of course, this is just a way to minimize downside risk and how much you want to have for that downside

risk you set as far as a percentage.

They'll fall below that initial buying price, maximum reverse excursion.

Or maybe it is a timing stop.

You think about timing and a lot of times trading software, a little just kind of show you a graphic

like the one we have below where it kind of shows you where these Emmys are and basically what it is.

It's the worst case loss that occurred occur over a trades time frame.

That's why it's a timing stop.

So you're you're the software of the software or the platform will do the calculation with your ideas.

You're calculating the biggest change in the Hielo range over a fixed period.

Let's say like twenty days.

It could be twenty minutes if you're a day trader, whatever your your timeframe is that matches the

ideas, you want to be a fixed period, that matches you're holding your typical holding period so you

can't bring results back from this.

We're back testing can really help on new trading platform to try these different type frames and see

how that would work for you.

And using the provided indicators of this and you use a percentage or fixed amount to set the stop loss

around that when you're playing around with the platform again.

And the opposite of that, by the way, is the maximum favorable excursion fee which can you can actually

use to use for profit-taking targets.

Right.

So when you'll see a graphic, let's say, on the platform, you'll see a graph like this where it's

going to kind of show these ranges.

And you can see that the lowest of the of this time frame, whatever that time frame is, that's your

total time frame you're seeing is in the image the lowest low of that.

That's your money.

And the highest high would be the movie.

And so if you look at that lowest low, you can use a percentage of of loss like we're talking about,

like these other ones, two percent, 20 percent, whatever it is, or a fixed amount, rather, was

two hundred dollars or two hundred units or whatever.

And you can set it based around that.

And you'd look at that kind of centerline, you'd look at when you're buying.

And then you would set based on this kind of indicator or this tool that you're trading platform.

Look, we'll provide you with it.

So look for if you're interested in that type of timing thing, look into your trading platform for

more details on how it in the mean things.

You want to establish the range you want to look at and have the range match up.

If your range doesn't match up, then you might be a little bit too aggressive or not aggressive enough,

you know, depending on your time frame.

So you want to look at that as far as the time frames that you've been trading on and that you're comfortable

with another type of money stuff that's really, really popular and really use a lot more, I think,

than me is trailing stops.

And this is a great idea.

I mean, the idea is that you raise the stop loss price as we make profits, right?

So you have your initial stop loss when you first buy it and when you first buy because you always are

going to get a stop loss.

But then if it starts to rise, you know, it's working out, your analysis is worked and the price

is rising.

And the trend is the establishment is going up.

You're going to start a stop loss along the way.

So basically what you're doing is you can do it on a percentage basis or a fixed amount, you know,

percent or more dollar, rupee, whatever type of currency amount.

How frequently are you're up to you.

That's up to you.

Could be Daley, could be more frequent, could be less frequently.

But the idea is that you're updating your stop loss to capture some profit.

And let's say you want to say there's a percentage, maybe you saying, well, I want to keep raising

my stop loss to cover eighty percent of the previous day's gain.

Right.

So it's.

Going up and now each day that it goes up and you're in a nice upward trend, maybe I'm adjusting my

stop loss upwards.

I'm always capturing at least 80 percent the previous day.

And if it goes like that over several days, you can see how I'm really capturing a lot of profit all

along the way while still giving me the safety net of a stop loss.

But I'll have my stop loss all the way to the bottom when my initial thing waiting for it to go all

the way back down.

I want to capture that profit.

And that's where a trailing stop helps you.

The key is to keep the stops updated, to protect those gains and guard against losses at the same time.

So that's why it's nice.

It's it's kind of works in concert with the targets as well.

So the benefit of all that is it's highly protective, right?

You're not waiting for it to go all the way up and all the way down.

You're going along with it as it goes up.

So it's highly protective and you're locking in those gains.

The downside is there's some frequent updating might take time to mentor how often are training, how

many securities you're trading for taking trading in lots of securities and how many of them are in

play at the same time.

It takes time to check them and update them.

And also some random noise activity can activate your stop and get you out before you want.

So if you said it, if you're captured, let's say, 80 percent of the previous day's game, that's

pretty good because that would be a 20 percent downward move.

Your voice locked in a lot again.

But maybe you want to make that, you know, a little bit less, less of that.

But let's say I'm selling my stop limits at, let's say, two percent, a two percent drop.

Well, two percent or 98 percent of the of the game.

Well, then I'm looking at maybe where it might drop two and a half, three percent in my stop loss

is activated, as in I sell the security automatically.

I'm locking in those gains, which is a good thing.

But then the downside of that is, you know, maybe that wasn't really an event and maybe I missed out

because it went back up as far as the as the profit.

So you can play you can adjust that as far as, you know, covering the putting those trailing stops

in and then just adjusting it.

You're there on a percentage basis or a fixed amount.

The last three day rule is an indicator based stop.

Right.

So we're going to use our tools here.

So is very basic, but it really works.

I mean, it follows along the lines of your indicators in market sentiment as well.

And so the idea that if your analysis works right, you've done all this hard work to identify a trend,

you should start seeing some profit right away.

Right.

It may go down a little bit and things move a little bit.

But the idea is you're identifying a great opportunity to buy in as far as on this trend.

And if you're wrong, let's say it's not the great, great time or it just doesn't work out, then then

you have time to get out quickly to.

So you could you could set something like a around indicator that's also run a little bit.

Timing, too, is you could say some like you would exit of the price passes the lowest low of the last

three days.

Right.

So an uptrend would be a series of higher highs and the lows.

And if that doesn't seem to be happening and it really starts kind of turn the other way, you can get

out real quick in a three day rule or whatever your time period is.

But typically the three day rule that if it passes the lowest low of the last three days, that's the

time to go out, not just because I went down a little bit, but it's past the lowest low of the three

days.

And that's constantly kind of moving forward along that.

So you're looking at your indicators as far as highs and lows and you're using three days.

So it's a little bit of a combination with a timing indicator as well.

Another indicator, another stop that's out there.

As far as the last one really kind of look at here is a pattern stop and this is an indicator based

stop.

And this is where you're trading off your indicators.

You're trading off indicator patterns.

So some patterns will tell you where to put your stops.

Right.

You're approaching either support or resistance line and you're looking for that.

And you're seeing if it's breaking through, let's say, like a support line as an example.

And it's going to keep going downward, not bouncing off that support line, go back up.

So it's like using, seeing and you can use it for profit targets, which are a little bit of that,

too.

But it's really just the opposite.

So you'd you'd really be looking at like we have a channel of some sort.

ANTHEIL Support lines.

If you bought something and you're going to get a stop loss, maybe at or maybe a little bit below the

the support line that way, if at some point if something happens that breaks through the support line

you're selling, then locking in some profits or you could do it.

We'll more you get more charged up towards a resistance line and maybe halfway through you just want

to get out because you don't even want to approach.

You've hit the thing.

It's hit the support line too many times.

Maybe you want to put it in more towards the middle and get out a little bit sooner, you know, so

and this is a you know, so this idea where you're using indicated can I tell you where to put your

stop loss and really buying your, you know, and making your trading decisions.

So let's say you in the example, let's say you look in the far left, let's say you buy near a support

level and you're anticipating a price rise, let's say, with at the far left of this example chart

here.

And so you would put a stop loss below the support price you bought at support, maybe a little bit

higher than that and at the support level.

So you put your stop loss below support price line in case there's a downward trend of some breaks through

that.

Something happens in a big event, something unexpected that breaks to that level, so there you've

protected yourself against those losses and then as it rises up, then maybe you want to sell as it

approaches the resistance level and then repeat it all if it repeated over and over again.

But you could see this one.

This is an example where it goes up to a nice resistance level, but then comes down but doesn't get

all the way to the support level at first.

It does on a second after a second trend or a second rise up kind of where that middle arrow is.

And so you're kind of watching that as far as maybe I would raise up my stop loss and make it more of

a limit where I might go a little bit higher above the small level, or maybe I go a little higher than

that even to lock in profits.

So you have to kind of look at that as far as how you want to do it.

But the idea is that you're using an indicator of some sort that's going to tell you that when this

indicator, a condition happens, that that's a sell signal and they're going to sell on that.

And you need to kind of watch for that as far as when you establish your trades.

But you're you're already kind of have that in there and you sort of stop loss based on that indicator

at the time of buying.

That's the key.

Again, you're always doing it at the time of buying to minimize those losses and hopefully maximize

those profits.

So stop losses are very, very important.

Do it.

It's going to really help you become a more successful trader for sure, because really where people

are in trouble trading is they don't have stop losses and something happens and it drops dramatically

in price, 10 percent down, 15 percent down in a very short period of time, within minutes or hours

sometimes.

And all of a sudden, boy, you know, you've set yourself up for a losing proposition.

And that's where a stop loss in place for a lot of traders will be like in denial, like, oh, gosh,

you went down so far 15 percent.

It's got to come up some and maybe it does.

Maybe it doesn't.

Maybe trade sideways for quite a time.

Either way, you're more like Lockean lost as that point as opposed to profits.

You're locking in a loss.

So having a stop loss kind of takes you out of those trades that maybe just don't work out.

So when you have your great trades that are going to hit these target prices and really have these nice

profit runs, you're going to do great with those and minimize losses on the ones that maybe don't work

out as perfectly as you would have hoped.