hey how's it going traders thanks for checking out this video my name is travis from master the
market and in this video we're going to be talking about how many traders use stop losses the wrong
way which leads to a lot of unnecessary losses in the market and i'm going to be sharing with you
the proper way to use a stop loss so that you can properly manage your risk so for those of you who
may not know a stop loss is simply an order that is going to automatically exit out of a position
for you in order to manage your risk so for example if you were to buy a stock expecting it to
go up in price but it kind of failed to meet your expectations you never really got the chance to
lock in profits on that trade and then the stock actually fell below the price that you bought at
causing a loss on the trade you could have a stop loss set below the price that you bought at in
order to automatically exit out of that position for you which is of course going to help you keep
your losses small and avoid taking large losses on any given trade now when it comes to the type
of order that you're going to set there are really two different main options for a stop loss order
the first is going to be a stop order which is simply going to sell your position at the market
once a certain price is reached so with the stop order you can set your price and once that price
is reached by the underlying stock it's going to turn into a market order to automatically sell
your shares and immediately get you out of the position with a stop limit order on the other hand
this is actually going to become a limit order to sell once a certain price is reached
so you're not only going to select a stock price but you also have to set a limit price which
is going to be triggered and activated once that stop price is reached now in my opinion stop limit
orders are a little bit more risky unless you're being very generous with where you're placing your
limit price because with a limit order there's no guarantee that that price is going to be filled
which is not going to be a problem with a regular stop order since it's going to be sold at the
market now very quickly if we take a look at this recording of my screen from a robinhood account
i know a lot of the traders that watch my videos use robinhood so i wanted to share this
to explain how you can actually set a stop order in your robinhood account
first you of course just have to go to the stock that you want to trade most likely since you're
setting a stop order you're already going to have a position in this stock then go ahead
and click on trade and you're most likely going to be using a sell stop to sell out of your position
so you would then go ahead and select sell and then in the upper right corner you're going to see
an option for shares and if you go ahead and click on that you can see under conditional
orders there's going to be the option for a stop order as well as a stop limit order you can then
go ahead and select which one you'd like and go ahead and place your stock price or if you're
using a stop limit order you would select your stock price as well as your limit price to sell
this is pretty much going to be the same process with any different brokerage that you're using
so over here we have an order entry box for etrade pro which is another very commonly used brokerage
all you have to do in this case is make sure that under price type you have either the stop on quote
which is just a regular stop order or a stop limit on quote which is of course
going to be a stop limit order and again all you would do then is select your stock price
as well as your limit price to sell now using stop orders in the thinkorswim platform with td
ameritrade is going to be a little bit different because they have the active trader platform
but still it is very simple so all you would do is make sure you're on the trade tab um and make
sure you have an active trader box pulled up now if we wanted to buy this stock apple for example
uh the current price of apple is 133.55 cents so if we hover over the buy side of the active trader
at any price below that you can see that by default it's going to set a limit order to buy
if the stock falls to that price the same is true if you set a sell order above the current price
it's going to be set as a limit order to sell once the stock goes higher and reaches that limit price
now if you were to set a sell order that is below the current price of the stock you can
see that by default it changes it from a limit cell to a stop cell so now you're automatically
going to be placing a stop order by selecting to sell below the current price of the stock
okay so now that you know exactly what a stop-loss order is and how you can actually place them in a
few of the most commonly used trading platforms i first want to talk about what not to do when
it comes to using a stop loss and this is a very common mistake that causes so many new traders
to take loss after loss after loss which they can really easily avoid by just following some of the
things that we're going to talk about here in just a minute so what this mistake is that most traders
do is they will place a stop loss just below a key level on a chart um and that's going to be some
kind of support level a trend line maybe some kind of indicator like the v web and so on and so forth
and that's actually not the mistake itself you do want to use something on the chart
like support trend lines or vwap to kind of base your stop loss off of but you have to be
very cautious with the way that you do this and unfortunately many new traders are not which is
going to cause them to get stopped out during a false breakdown below one of these key levels on
the chart and then they're going to miss out on the bullish move that happens afterward
so for example if we take a look at this chart for facebook you can see that at the
market open at 9 30 a.m eastern standard time facebook forms a low and actually spikes back up
uh so that low point at the open is naturally going to become a little bit of a level of support
being that it is the opening range low fast forward about an hour in the future the stock
pulls back to that level it seems to bounce up above that level and hold as a level of support
so right here in this area is where a lot of people would see that support level starting
to form and then go ahead and buy into facebook for a trade now because there is a level of
support there is going to be a lot of stop losses that are placed just below that support level
because people are going to want to cut losses on their trade once that support level is broken so
on this false breakdown here when it briefly breaks below that level of support there's
going to be a lot of stop losses that are hit causing many traders to take a loss on this trade
right before it spikes back up and actually has a big run to the upside so in this case
not only are you missing out on this big run to the upside that does happen but you're also
taking a very unnecessary loss on the trade by not placing your stop loss in the proper place
so the very simple solution to this problem is to give your stop loss some wiggle room
below any level on the chart that you're using to base your stop loss off of
in my opinion you should allow anywhere from three to five percent below a support level before your
stop loss is actually triggered so believe it or not if there was a level of support on a stock at
ten dollars per share there's a lot of new traders that don't really understand that you need to give
it some wiggle room so they'll place their stop losses at 9.99 9.98 and so on and so forth they're
not giving it enough room to actually breathe and because of that they're getting stopped out on
these false breakdowns below that support level and then missing out on any moves to the upside
so again you want to give it some kind of room below any level on the chart which
is still going to help you manage your risk if the stock is really going down
but it's going to drastically reduce the amount of times that you're stopped out on a false breakdown
and as far as the amount of wiggle room that you want to give the stock goes it's really going
to be dependent on that individual stock in that individual setup so for example if we take these
two charts here and compare gamestop stock on the left side to bank of america stock on the right
side on any given day a stock like gamestop trades within a pretty big range of at least 10 percent
okay now when you compare that to a stock like bank of america which is much less volatile and
much more consistent and stable bank of america trades within less than one percent of a range
on any given day so in order to properly place your stop loss you have to know which kind of
stock you're actually dealing with is it a highly volatile stock that trades within big ranges on
any given day or is it a slow mover that doesn't trade within big ranges and stays within maybe
one to two percent within any given trading day if you're dealing with a highly volatile
stock like gamestop in that case you're going to want to give it a little bit more wiggle
room below any level of support than you would with a less volatile stock like bank of america
okay so now at this point you may be thinking that you're going to be taking larger losses
on a lot of these trades since your stop loss is set so much further below a level of support
so i just wanted to share that ideally that should never be the case you might be risking
a couple of extra percent below a support level than you would have previously by using this type
of stop-loss strategy but the way that you can offset that is by adjusting your position size
based on your max risk and based on your distance from your stop loss
so even if you're risking a larger percentage you should still be risking the same amount of money
that you previously would this is going to again keep your losses small
in terms of how much money you're actually risking and how much money you're losing on any given loss
but the big thing is that it also should greatly improve your accuracy in the market
and of course prevent you from getting stopped out in a lot of these false breakdowns
and then missing out on the big move that happens to the upside following that false breakdown
okay so that's going to be a wrap on this video i hope you enjoyed
and learned something about stop losses and how to properly manage risk in the market
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but anyway thanks again for watching i hope you enjoyed and good luck with your
trading