Regarding stops, here's my system in brief.
Look for a stock that is pivoting into a trend and work to get a good price and timing on entry. But assume that there is a 50% chance the trade will go against you. There is no sure thing.
Decide how much of your portfolio you're comfortable risking on the trade. For me its usually 1% max. So if your capital is $500,000 you'll risk $5000 on a good idea.
Look at the stock's volatility (average true range)over some period. I like 13 days. For example, today HAL's 13day ATR is $0.80. You want an initial worst case and trailing worst case stop at some multiple of HAL's volatility. Some studies show that if a stock moves against you by more than 2.5 ATR, then you calculated/figgered/was told/guessed wrong. So you choose, for example, a 3 ATR stop, which for HAL is $2.40. You enter HAL by purchasing 2,000 shares ($5,000/$2.40)at $17.25 with a stop at $14.85. Move the stop up by 3 ATR as price rises, only changing the ATR if it gets smaller.
You know you're out of range of a normal pullback and comfortable if your stop is hit that you aren't going to get killed. You can add stops, eg if your profit is double the $5000 you risked or some other goal, tighten the stop to 1.5ATR. As far as discipline with mental stops, I trained myself to look forward to my stop getting hit so I would have some cash for another good idea.
If you had a chance to look at my charts at groups.yahoo.com, after the stock starts moving in my direction, I use the Andrews' pitchfork trendlines to set stops and sell targets.
RWS |
