Setting a stop order by any of the above methods is somewhat arbitrary and often causes frustration when the market finds your stop. Determining what level to place a stop is a little more involved than simply placing an order "out in space" and hoping the market will go the other way. I have advised many of my students to follow some of these steps:
Hope this helps some.
- What has "created" or caused you to enter this trade? Most traders have a set of criteria or conditions they recognize that favors a trade in one direction or the other. Thus if this is the case with you, then consider identifying also what conditions must exist for your to consider your trade to be "invalid". Where does price have to go for you to say, "...ooops I guess this trade isn't working..." Place you stop there. OR
- Use the most recent swing point or inflection point (in the opposing direction) and set your stop just beyond it. Ex: If you have entered a long, place your stop below the last bearish swing low point and vise versa for a short. This style also requires a bit of fineness because the market seems to delight in seeking out stops and targeting them. The swing points are the most obvious places for the market to "test".
- Finally, if any of these ideas requires a stop too big to fit into your risk management plan for contract sizing, consider NOT trading, as you may be entering too late and the market may not go as far as you think it will before it retraces. I call this "the F*** Y** stop", others call them "crazy Ivan". I try to anticipate when these will occur and then wait to enter until one of these is just about finished. Then your stop can safely be placed under the swing point formed by these moves, and it is usually MUCH closer to your entry.
Hope this helps some.
