Swing Trading Stop Loss
Example Using BAC
Where do you set a Swing Trading Stop Loss? Good question, and every trader should be thinking about this "before" they enter "every" position. Did you read that part? "Before" they enter "every" position, and that means you too. This planning ahead of time, is part of your pre-determined exit strategy.
The answer is not set in stone though. Where you set your stop loss will depend on your personal trading strategy and risk tolerance that should be part of your complete plan. In other words, the location of the stop loss will vary from trader to trader.
This page will give an example of where to set a basic initial Swing Trading stop loss using a specific trading example, but will not take into account your personal risk tolerance or other specific trades. This means that what you will see here is an example only, and you should make your own final decisions and adjustments as necessary to fit your own strategy.
You may also notice I mentioned "initial stop loss". I mentioned this because there are many types of stop losses. Examples are: fixed price stop losses; fixed percentage stop losses; trailing price stop losses; trailing percentage stop losses; mental stop losses; end of day stop losses and various other methods that can be concocted depending on what works for you, and how complex you want to make your life. Stop Losses can also be moved. They don't have to remain fixed, although they generally should only be moved in your favor, not against.
Here is a chart showing the example we will be going over. It is a one year daily chart of Bank of America (BAC) up through mid-September 2008:
The example shown begins by illustrating a Descending Triangle pattern formation. Once the experienced trader that you will become recognizes this pattern forming, you will look to enter a Short position at point #1 shown as the price reverses off the upper trend line of the pattern. You would be considering a Short position because you will know that a Descending Triangle pattern is generally a Bearish signal.
Once you enter your Short position you then can set your initial Swing Trading Stop Loss somewhere above the upper descending trend line to try and minimize potential losses, as shown at point #2 on the chart.
For this example I have used $42.50 as the initial Swing Trading Stop Loss because our reason for entering this trade was the expectation of a decline based on the Descending Triangle pattern we recognized. This means that if the price moves up through the upper descending trend line, it may not be a Descending Triangle and that would mean our reason for entering the trade was wrong. That means get out.
Note that $42.50 does not have to be the exact stop loss price level. $45.00 could have been used as well or other price levels that would give reason for the possibility of you being wrong. At whatever that point is, admit it, get out and move on.
Again using this example, once the price broke down through the bottom support level at $35.00, you could have adjusted your Swing Trading Stop Loss in your favor by moving it lower to say $37.50 for example. This would help to protect profits while allowing for future profits, which in this case would have continued to increase.
I have been using the term "Swing Trading Stop Loss" throughout this page so that you realize this is in fact a Swing Trading example. The same pattern and methods can be used for Scalping, Day Trading and Longer Term Investing as long as you make adjustments to fit your trading time frame and strategy.