Protecting Profits While Day Trading
In learning stock market day trading, the first things that you need to learn are the basics. These include familiarization with the basic trend in a stock, the basic long and short setups, when to enter a trade and where to place stops. Once you know these, the next thing is to learn how to protect profits and limit losses by adjusting your stops. In adjusting, you use trailing stops. There is a number of trailing stops commonly used by traders. They can also be combined depending on the situation a trader is in.
The Original Stop
Our original stop for a buy is just below the previous day’s low by 1/8-3/16 and the other way around for a short. The other original stop used is usually used in the event of a gap past your original entry point where you use a 30 minute rule to enter a stock. In case of a buy, where the stock gapped up 1/4 above the buy price and it was entered when it broke the 30 minute high, use 1/8-1/4 below the given day’s low at the time the stock sets up as the stop. Likewise, place your stops a bit further away in more volatile stocks.
Protecting Profits
The first thing to look for in a stock is a place to protect partial profits. Price resistance, either previous price resistance, whole and half number price resistance or moving average resistance could serve the purpose. Usually, partial profits are taken after a significant morning price movement or in the last half hour of the trading day. The rest of the position is held until rational expectations are met.
Trailing Stops
Trailing stops are designed to protect profits while maximizing the traders’ potential. one of the trailing stops used is a break in the 15 minute 20 simple moving average. This means that when an entire candlestick bar trades on the other side of the 20 ma and closes there, that closing price is the price where you initiate stop. Using the 20 ma on the 5 min chart can also be resorted to. This is oftentimes used after large moves and in uncertain markets.
Another potential trailing stop is a break in an intraday consolidation by 1/8 or so in the opposite direction. Once more, adjust this 1/8 according to price and volatility. The final trailing stop is used daily; it is a break under the previous day’s low. This is commonly used after several days of higher highs or in more volatile markets.
Knowing the stops will dramatically lessen your chance of committing same trading blunders.
