lets say hypothetically speaking youre in this trade: BBH @ 79.56 x 300shares where would you institute a stoploss??? and is there a general rule of thumb when placing stop losses???
how much profit do you expect to make, and how much can you afford to lose ? Its all about risk vs. reward.
Place it right below the most apparent psychological level. If the stock has bounced at 79.5 three different times, put at about 79.45 or 79.4. Or if there's no apparent support level, people tend to make decisions with round numbers in mind (79.0 is a good round number, so the stop could be placed right below at 79.8). The tighter the timeframe, the tighter your stoploss (must keep a greater control of risk). Risking a nickel or dime would be sufficient for a daytrader, but obviously, on the larger timeframes, you're going to have to allow wider stops in order for the trade to develope.
There is a lot that goes into determining a stop loss. But generally I would never risk more than 3% of my entire port on a single trade. And that is only if I stand to make a load on the play. Most of my stops are in the .10-.20 range with a few going to about .40. I keep very tight stops and am glad I do. It allows me to live to trade another day.
the person who told me my stop shouldve been 79.10 said that my risk/reward ratio should be 2:1... what does that mean in laymans terms??? (if my reward is a dollar my risk should be .50???)
Not much. If you're looking at a stock that's at 30, and you decide that you're going to buy it, and you also decide that your target is 33 and you want a 3:1 ratio, so you set your stop at 29, you may as well just give the money away. Prices fall of their own weight. In order to rise, they have to be propelled by demand. Therefore, there has to be some reason for you to expect that your stock will rise rather than fall. If you have that reason, you may want to choke off the advance by selling at a predetermined target, or you may want to trail a stop and let your profits run. Your choice. But you must have some reason to expect that the price will advance rather than decline. Therefore, rather than get twisted up in risk reward ratios, which are mostly wisful thinking, assess your trades in terms of low, medium, or high risk, and low, medium, or high probability. You're much more likely to find yourself in winning trades this way. --Db
at the risk of sounding like a complete moron... how do i or should i say what is the proper way of assessing low, med, high probability???