How To Pick A Stop Loss Level When Day Trading

Anyone who trades or invests in stocks knows that proper money management requires one to figure out at what level the idea is wrong and should be cut off. This applies to both short sales and buying stocks long. I am going to share a few tricks of the trade for determining the proper stop loss when day trading stocks.

First off, pull up an intraday chart of the price for today. Exact timeframe does not matter, but a 5 minute chart will work fine. Look at the range (high-low) of the stock in the last 20-30 minutes or so. The larger the range, the larger your stop will likely need to be to let the stock have normal oscillations in price and not get you out for no reason. We will call this the micro-range. This micro range will help us create our automatic stop price.

Once this is done, you should look for the last decent up bar (if going long), or the last decent down bar (if going short) in the last 30 minutes or so. To be on the safe side, for buying the price should currently be above the low of this up bar, and if shorting, the price should be below the high of this down bar. Waiting for this to happen will keep you from trying to guess a trend turn, which can be difficult. Once you see this turn point, it is an excellent place to start with the automatic stop. If there is not any decent up bar in the last 30 minutes (or down) to work off of, you can go back a bit more but you never want to go further back than about 60 minutes or so. If there still is nothing good, move on to another name or wait for that to happen so you have something to work from. Computers are very good at figuring this out, such as the automated robot.

Once you have this high or low price, figure out how far from that low or high the price currently is. Compare this number to the micro-range number you had earlier. Ideally you want this micro range number (if subtracted from current price for long) to go decently below that low price, or for shorts, decently above the high price when added to it. This high or low pivot number should provide some support or resistance (if shorting), and that combined with the micro-range number you can figure out a stop. If the micro-range number when subtracted from current price is still above this low point for longs, you need to wait for a pullback to buy to lower the risk. Converse for shorts.

Ideally you want the micro range to extent about 1/2 to 1/3 below the low for longs, but no more. Here is the reason - that pivot point will likely provide some support AND if at the same time the stock is getting a bit extended to the downside vs average movement, it is more likely to turn back up, even if it breaks it a bit.

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