The Original Stop

Our original stop for a buy is just below the previous day's low by 1/8-3/16 and vice versa for a short. If this price is just off a whole number we will place our stop 1/8 on the far side of the price. For example, let's say we are looking to buy a stock at 40 1/8 and the previous day's low is 38 1/8 we would place our stop at 37 7/8 because the whole number 38 will serve as support. We place it 1/8 below that whole number because it can often break it by 1/16 by people that get too antsy, but it typically breaking it by 1/8 will signify that the break it real. The other original stop used is most commonly employed in the event of a gap past your original entry point where you use a 30 minute rule to enter a stock. In cases such as a buy, where the stock gapped up 1/4 above our buy price and we entered it when it broke the 30 minute high, we will most often use 1/8-1/4 below the established day's low at the time the stock sets up as the stop. Make sure you adjust the 1/8-3/16 amount according to the price and volatility of the stock. To a stock over $200/share, 1/8 is nothing so you want to place your stop lower than 1/8-3/16 under the previous day's low (or current day's low.) In this case $1 would be more reasonable. Similarly, in more volatile stocks you also want to place your stops a bit further away.
 

Protective Stops while Day Trading - Part 2

Protecting Profits

The first thing we look for in a stock is a place to protect partial profits. These are most commonly at price resistance, either previous price resistance, whole and half number price resistance or moving average resistance. Most often partial profits are taken after a large morning price movement or in the last half hour of the trading day. Usually this will cover the stop. The rest of the position is held until reasonable expectations are met (such halfway to a new high from the entry price), at which time a trailing stops is initiated. Another way to take partial profits are after huge moves in a short period of time. After a large move in a stock you will typically see a pullback (or bounce in the case of a short), sometimes this pullback is short-lived, at other times it serves as the best price the stock will have that day. So to best optimize this move we want to get out of partial shares when this move appears to be nearing an end. This is usually when the pace starts to slow and even pause. Often the first time the stock will take a break before moving again in the same direction, but with each break the more likely the next will turn the stock around, at least temporarily. Often these pauses will occur at resistance and I usually protect partial profits at the first or second time I notice a stock will have trouble, depending on how strong I view the resistance as being. Let's say a stock is nearing a whole number like 75 and I am already up point or so in it... before it has even traded there I will place an order between 74 7/8 - 75 to sell part of my lot. By entering the order earlier I have a better chance of getting a fill.
 

Trailing Stops

The other types of stops are the ones we call trailing stops and these are designed to protect profits while maximizing potential. We will discuss these in terms of a buy, just use the opposite when dealing with a short. One of various trailing stops we use, is a break in the 15 minute 20 simple moving average. This means that when an entire candlestick bar trades on the other side of the 20 ma and closes there, that closing price is the price where we initiate our stop. Another is using the 20 ma on the 5 min chart which is used in the same way but for different reasons. Mainly this is used after large moves and in uncertain markets. This can also be used to take partial profits while keeping a stop on the rest of your shares just below the day's established low. Another potential trailing stop is a break in an intraday consolidation by 1/8 or so in the opposite direction I want to stock to go. Again, adjust this 1/8 according to price and volatility. The final trailing stop is one we use on a daily and that is a break under the previous day's low. This is used most comonly after several days of higher highs or in more volatile markets.

These are the types of stops we typically use and although there are other possibilities always base your stops on reasons you can back up with logic. Never stop out of a trade just because you "got bored" or "scared" or "just didn't want to take that much of a loss." Your original stop should already have taken into account how much you could loose and what an acceptable stop was (i.e. 0.5-2% of your account,) so any other stops should never risk more than your original stop. Over and over again, we see people exit a position just 1/8-1/4 before it turns around in what would've been their favor. We have even seen them get out at the exact low because they panicked. Hopefully this discussion will dramatically reduce your changes of making the same blunder, or at least of repeating it.