Stop loss order & where to take profits (buying/shorting stocks) // Stop loss order explained, stop loss order example, stop loss stocks, stop loss options, stock market stop loss, stocks stop loss, stop loss explained, limit order david moadel
David Moadel sometimes people ask me if
i buy a stock where should I set my stop
loss and where should I take profits so
i'm going to explain that as simply and
quickly as possible
ok so let's say this line in the middle
here represents the stock price when you
enter the trade
alright so for example we'll use apple
stock let's say you buy apple stock when
it's a hundred and twenty dollars per
share
120 ok so you buy apple at 120 per share
right here
ok so first you have to think about the
maximum amount of money that you're
willing to lose on that trade and it
should it should be a small amount it
should be five percent of your trading
account or less
better yet if it's only one or two or
three percent of your trading account
that's even better because I believe in
taking small position sizes portrayed
but think about the what's the most
you're willing to lose on this trade
without getting emotional about it
because you don't want emotions to enter
into this
alright so decide beforehand commit to
yourself that I'm you know I'm willing
to lose this amount without feeling
emotional without without feeling fear
or greed or anything like that
alright so take that number
and now you're going to set your stop
loss order so you're going to take the
stock price when you enter the trade and
and then you're going to subtract the
amount that you're willing to lose
and so you end up here at this line and
that's your stop loss order and you can
place an automated stop loss order with
your broker
alright so once again your stop loss
order is placed at take the stock price
when you enter the trade subtract the
amount you're willing to lose on the
trade without getting emotional about it
subtract that and that's the price what
your stop loss is going to be set and
you you want to sit that you know right
right after you buy the stock you should
or or at the same time set your stop
loss order
and don't move it don't don't you know
avoid the temptation to move it down and
down and down stick to it
ok and so for example let's say you
you're buying apple at 120 and per share
and the most money you're willing to
lose on that trade is let's say five
dollars per share anything over that in
and you're going to get emotional and
fearful about it so five dollars per
share is what you're willing to lose on
the trade
ok so one 20-5 you would set your stop
loss at 115 per share simple
ok then you figure out where to take
profits if if the if the stock price
starts to move up and up and everything
goes great
ok so what you do is you remember that
amount you're willing to lose that you
committed to you decided you're late
you're willing to lose that without
getting emotional take that number and
take that amount you're willing to lose
and multiply it by three
for example take that in this Apple
example you take the five dollars
multiply it by 3 so $15 x 3
ok so you ending now again we're back to
you take the stock price when you enter
the trade and now instead of subtracting
you're adding you're adding that
that number that that amount you're
willing to lose x 3 you add that number
to the stock price when you enter the
trade you add that and that's the price
where you are you set your limit order
to take your profits if if the stock
price goes up and up and up
ok so in this example you would take you
know 120 you bought apple at 120 and
you're willing to lose up to five
dollars per share five times three is
fifteen add that to the 120 and you
would set your your profit target for
135 apple at 135 that's 120 + 15 135
and that's that's really all there is to
it and the hardest part for many people
is avoiding the temptation to to move
the stop-loss down okay and also
avoiding the temptation to cut your
winners short yet you have to let your
winners you have to let your winners run
all the way to your profit target and
you have to cut your winners so you cut
your losses cut your losers short and
you let your winners run that's how you
get that three-to-one ratio when I say
three to one ratio when you win every
time you win you went three times as
much as you lose when you lose
alright and so avoid and it but in order
to make that work you have to let your
winners run avoid the temptation to take
profits before it reaches your profit
target let let it wander around wherever
it's going to go until it either hit
your stop loss or your profit target one
or the other
as simple as that ok and so you have to
be unemotional about it and let let let
the market and let the stock go where
it's gonna go
now what if no then let me tell you
what's great about this method since you
win three times as much when you're
right as as you lose when you're wrong
that relieves you of the burden of
having to be right all the time you can
be wrong
half the time
or even a little bit more than half the
time and still come out ahead over the
long term if you have enough trades
because again every time you win you
went 3-2 three times as much as you lose
when you lose so you could you can be
wrong
quite a lot of the time and it's okay
all right you don't have to feel like
you have to be right all the time
now that's if you're taking a long
position if you're buying a stock what
if you're shorting a stock then you
reverse these
you put your stop-loss above the stock
price when you enter the trade and that
depends on how much you're willing to
lose and that's your stop loss and then
you take profits three times that amount
below
alright when the stock price goes three
times that amount below so you take this
and you put it down here and you take
this and you put it up here so you stop
losses here your profit target is way
down here three times as big 33 times as
wide as your stop loss above so you just
reverse all this for when you're short
selling or shorting a stock
so I think I kept it pretty simple there
and it's very effective that 321
amount you went to amount you could lose
ratio it's very effective and it's very
simple it's a simple method
ok so i hope that was helpful to you if
you have more questions about it if you
just want to learn more about this or if
you have questions about trading or you
want to put together a trading plan or
investing plan i can certainly assist
you with that
my name is David Modell and my email
address is David Modell @ gmail.com and
you can contact me at any time if you
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videos thank you so much i appreciate it
and I'll talk to you again soon