So right now, I want to show you how
to calculate the best stop loss
if you are trading stocks.
And I want to show you very specific
examples.
We'll look at examples like Tesla.
We'll look at examples like
Apple. And this is for you if
you are trading.
Now, trading is different than
investing. When trading, you're
actively placing a stop
loss to limit your losses
and a profit target where you take
profits. Today we're gonna focus
on how to limit your loss because
we want to make sure that you are
not losing your shirt
when trading.
So let's get started.
So, first of all, when we talk about
placing a stop loss,
there is two things that you need
to keep in mind.
First of all, we are looking at a
stop loss per
trade, right?
So if you're entering a trade, you
need to limit your risk.
And this is where we are looking at
the 2%
rule. What does the 2% rule
mean? The 2% rule means
never risk more than 2%
of your account on any given trade.
So let's say that you have a $10,000
account. So when you have a $10,000
account, your risk should
be 2% of $10,000,
which is $200.
So never risk more than
$200 of your account on any given
trade. And here's why.
Now, let's say that you have, for
example, 5
losses.
You have 5 losses, actually, you
know what? Let's be even more
conservative and say that you have
10 losses
in a row, which can happen.
So if you lose 10 times
$200, you lose
$2,000.
Now, of course, this is not nice,
but you still have
$8,000 left.
So you're still alive.
You can still trade, right?
You started with the $10,000
account.
You have 10 losses in a row,
which, by the way, is quite an
accomplishment, because if you have
10 losses in a row, you might want
to revisit your strategy and go back
on a simulator for a little bit.
But you see, this is the key
when limiting your losses,
you're still alive.
You only lost $2,000 and
you can still trade and make back
the money that you lost.
So is this making sense so far?
Because if it is, do me a favor and
click on like really quick because
this way I know if I'm going too
fast or if I'm going at the right
pace here.
And if you have any questions, as
always, leave a comment
and I'll answer your questions right
here. OK.
So never risk more than 2%
on any given trade.
However, here is the deal.
Now the question is how
much should you risk
per share that you're
trading?
This is an important distinguish,
that you need to distinguish
between these two.
Because let me just use Tesla
as an example.
So Tesla right now is
trading at $550.
So when I'm talking about
having a stop loss of
$200, the 2% rule
per trade, does this mean
that you should apply
a $200 stop loss
to Tesla?
So meaning that if Tesla goes down
to $350
that you're selling it?
No, this is not
what it means.
So when we calculate
the best stop loss per share,
I like to use a concept
that is called the average
daily range.
And I'm going to show you in a
moment on the chart what it means.
The average daily range I like to
look back over the past seven days
and I want to know how much
did a particular stock move
on average, right?
Over the past seven days.
So, here I have a chart of Tesla.
And right now, as of April
7th, Tesla is trading
at $548,
so almost at $550.
Now, here is what I would like to
look at. I personally like to
calculate the average daily
range. It's slightly different than
the average true range.
But for our example here,
we can use the average true
range. Here's what you do.
You click on the F
and you bring up the ATR,
the average true range.
Now when you do, see, it'll
show it right here
on the screen and I want to make
sure that I customize it.
I'm clicking here on the ATR,
on the little gear icon and I'm
changing the length
to 7.
And for the smoothing, I don't use
an RMA, I'm using an
SMA.
This is a simple moving
average.
All right. So this is where you can
see right now, Tesla on
average. You see it right here in
the bottom? You see the Tesla on
average is moving with
$45 per day.
You see today alone compared
to yesterday, it's up
$32. So this means
that you need to place a stop
loss of at least
$45 when you're swing
trading stocks.
Otherwise, you will be stopped out
way too quickly.
So you're looking at the average
daily range here.
So for Tesla here, this is $45.
So this is $45
per share, meaning
that if Tesla goes down from
$550 to
$505 this is when
you would get rid of it.
This is when you say, "I was wrong."
OK? It's going in the wrong
direction. You're buying Tesla
because you want Tesla to go
up. If it is moving against
you get out!
And I mean, get out before
it gets worse.
So, however, if we want to
risk $45
per share
and now we also want to
overall risk $200
per one trade, per
this Tesla trade.
How many shares
are we allowed to trade?
You get the idea?
We take the $200 and now
divide it by $45.
So this means that we can trade
4 shares
of Tesla because 4
times $45 means
that we are risking $180
overall on this trade.
Is this making sense thus far?
We'll do another example in just a
moment. But let me know if this is
making sense and if it does, give
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So now we want to do the same
thing and we're doing it
for Apple. So Apple right now
is trading at
$262, let's just say $260
as I'm recording it.
So let's take a look at the charts.
And again, what you want to do here
is look at the ATR
the average true range or
I like to use the average daily
range, but it's not built into
TradingView, so therefore we use the
average true range.
And you see it is
$11.
Quite different from Tesla where it
was $35.
You see, when you have a stock that
is more volatile, you have to apply
a larger stop loss.
And here we can apply
a smaller stop loss.
We have to give the stock at least
$12.
Otherwise, we're getting stopped out
too quickly.
But on the other hand, if you're
buying it and it doesn't immediately
move up, get out
right away.
This making sense?
Good. So since we have the average
daily range of $12.
And now again, we have to see
overall on this trade
we want to risk $200.
So how many shares should
we trade of Apple?
See, previously in the example of
Tesla, we were trading
4 shares.
And here we're taking the
$200 that we want to risk
overall and
divide it by $12.
It's around 16
shares. OK.
So this means here, instead of
trading 4 shares, we
are trading 16
shares.
What does it mean? Because 16 shares
times twelve $12 per share
that we are risking would be
$192 that we risk,
which is in line
with the overall $200
that we want to risk.
It is very important that you use
the 2% rule for the
overall risk per trade,
and then you use the average
daily range to calculate
how much you should risk per share.
So in our example here, Apple,
see if Apple moves down from $260.
If it moves down by
$12 to $248,
you get out of it.
Because it means that you were
wrong, okay?
Now when you apply
these two key principles,
this is how you preserve your
trading account.
Because with the 2% rule, as you can
see here on the left-hand side,
this is how we make sure that we are
not wiping out our account
on a single trade.
And now, the key question is, how
much should you risk per share?
And this depends really on the stock
that you are trading.
Stocks that are more volatile like
Tesla they require
a larger stop loss, and stocks
that are a little bit less volatile
like Apple right now they require
a smaller stop loss.
All right.
Hope this helps.
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