Where do I put my stops to avoid being taken out?


This trader inquiry was in my email inbox this morning:

I would like to know where to put my stops to avoid being taken out.

This, of course, is a question a great many traders have. On the one hand the answer is easy. On the other, it’s not.

Here’s the easy answer. You should place your stop outside the price range which would be part of normal volatility. This is something a great many new traders don’t get.  When you put a stop inside the normal volatility zone you are almost guaranteed to see it get hit. It’s a probability situation. For example, if you put your stop 5 points away from the current market price and the normal volatility for the timeframe in question is 10 points, you can just about be sure you’ll be stopped out.

Of course the trick is figuring out what that volatility area is going to be. Some traders use things like Average True Range (ATR) to develop an idea of what current volatility is looking like. Others might use Bollinger Bands, or any indicator which provides and indication of price or range volatility.

Personally, my approach in placing stops is to put them at a price level which if hit means that in all likelihood the market action I was anticipating isn’t going to play out. That, of course, comes from the methodology you use for your trading.

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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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  • http://blog.mdwoptions.com/options_for_rookies/ Mark Wolfinger

    Thus is a dual-edged sword.
    The purpose of stop loss orders is to get stopped out of a losing position.

    Suggestions: Trade much smaller size, allowing a larger loss on each unit. Not that larger losses are the objective, but that way the stop can be placed outside the range of normal volatility.

    Or trade options instead of stock, using spreads, rather than naked longs or shorts.