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 Here's the deal with stops (or stop loss orders)...put them too tight, you get stopped out very often out of what may become, very profitable positions. Put them too wide and you deplete your account unnecessarily with huge losses. The end result in both situations, you bleed your account. This leads to frustration, your thinking becomes murky and your actions in the market become rash and consequently, very dangerous for your account.
Risking Less To Gain More!
So isn't there a satisfactory answer to this "stop-loss" placement issue that will make you a super-trader? To put it simply, NO...there is no easy answer to this question. Each trader has to find his own comfort level and how much he is willing to risk in a trade. Too many new traders take the old trading guru's mantra of "risking only 2% of equity" too literally. For them, 2% equity stop loss is carved in stone and they miss the underlying message of "risking less to gain more". The trick is to stay in the trading game long enough to know what is happening and what moves the markets. Seasoned traders know when the odds are against them and they don't need a mechanical or technical indicator based stop loss order to get them out of the market. For example, a good discretionary trader might get out of a long trade because institutional traders have begun selling the market or maybe because a correlated market e.g. bonds, oil or a key equity sector, has made a breakout in the wrong direction. To put it bluntly, seasoned traders are rarely wrong when they enter a trade as compared to a newbie who will almost certainly enter the market at the wrong time. Seasoned traders are very situationally aware such that they can sense the change in the "tide" and exit or flip their position immediately, even though technical indicators and other price action confirmations have not been triggered. A newbie, on the other hand, will be like "a deer caught in the headlights" when the market suddenly turns.
Is there a Holy Grail Number or Indicator?
If you really think about it, it all boils down to how much an individual trader wants to succeed. This hunger for success will keep the trader in the markets long enough for him to be seasoned in the ways of the market. There is no magic "stop-loss number" and no "holy grail" indicator that can help you achieve this. You need to put in the required screen-time to understand the markets and the particular instrument you are trading.
If you understand all this, then you are on your way to being ready to receive the riches that the market has to offer. Godspeed!
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