Stop-Loss Trading Strategy
Developing of a stop-loss trading strategy is one of the most important question in the trading life of every active trader. A correctly developed trading strategy helps to protect earned profit and to avoid dramatic losses that could wipe out all investments. There are several factors that define the main rules by which a stop-loss trading strategy is developed.
A selection of stop-loss strategy is a complicated task mainly because it depends on many factors. Some of these factors are trader's risk tolerance, selected trading vehicle, trading style, stock market behavior, etc...
Risk Tolerance: There are different traders on the stock market. There are conservative and risky players, there are retired people and there are young traders. Everybody have different risk level and in many cases a stop-loss strategy depends on the personal preferences of a trader.
Trading style: Different traders trade differently. One trader makes 5 trades during a single session and another trader makes only one trade a year. Respectfully, the first trader could be looking for tight stop-loss strategy while the second trader could be looking for flexible, less strict stop-loss.
Trading Vehicle: You may trade stocks, options, futures and with any of these tools you would be looking for a different stop-loss. While a stock trader could be looking for constant stop-loss level, an options trader may select two dimensional stop-loss strategy (price and time: the longer you stay in position the tighter stop-loss become).
Stock Market Behavior: The stock market changes constantly. Today you may see quiet peaceful up-trend; in month you could be in the volatile, scary decline. Depending on market volatility a trader may select different trading strategies: tighter during quiet markets and more risky during volatile periods.
These are only a few factors that affect selection of a stop-loss trading strategy. Yet, they already show how complex this question is. Every trader should come to this question very seriously. There is not a lot of information about that and in many cases a trader has to learn and develop a stop-loss system by using his/her own trading experience.
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