Some pick a random percentage as an acceptible loss, such as 5 or 6. Others choose an acceptible dollar amount loss (which is really the same thing, but may feel better psychologically)
I've still got a great deal to learn on this one.
One of my rules is: never lose a profit. In other words, if I enter a position and it moves in my favor (up if I'm long, down if I'm short) I DO NOT allow the position to turn against me.
This is an ultra-conservative approach, and I miss some good runs because of it. However without this rule, when a position I'm in goes bad, I have a tendency to say "ok, when I'm back even, I'll sell" and this is a devastating attitude; very often the position just keeps getting worse.
Also, as has been mentioned by many others, if you enter a position and it moves in your favor, keep moving your stops to protect more of the gain.
Finally, set an upper target and take all profits if you reach that target. Occassionally, you may latch on to a great runner (such as GERN last Friday). If your position moves up by 50 or 100 percent in a couple days, take the profit -- stocks just can't sustain that type of growth that quickly -- they will pull back. You can always re-enter the stock later.
For me, there is a psychological advantage to selling a big winner and buying it back. I tend to think about my most recent entry price, and trade accordingly.
For example, I bought Geron on Thursday at around 7 7/8. Sold on Friday at 19 1/4, then re-purchased at around 19. So, rather than thinking that I'd entered the position at 7 7/8, I considered 19 my cost basis, and I set my stops accordingly. This prevented me from allowing Geron to slip all the way back down to 17 before I sold back out. It's just a mind game, but it helps me.
I think there are some experienced technical traders who might have a much more precise set of rules for stop limits. |
