Ask Colin

How do you set your stop-loss?

I use support levels for stops. A support level is where demand appeared in sufficient strength to overcome supply. The expectation is that if price came back to that level later, it should again represent value to buyers. If, on the other hand, that support level did not hold, then the supply demand balance has changed.

So I place my stop just below the last support level in the trend or below the last significant or lowest support level in an accumulation pattern on breakout.

If you set your stop above the last support level, you are in my view actually increasing the risk of a losing trade. If the trend is still intact while it makes higher troughs, it is not sensible to sell while those higher troughs are still in place. What will happen is that sometimes you will be right and sometimes you will be wrong. When right, you would have been taken out by the stop anyway, though at a slightly higher loss. However, when your preliminary selling is wrong and the trend booms on without you, you have turned what should have been a winning trade into a losing trade. I do not see the logic in increasing the number of losing trades and curtailing winners just to save a bit of the loss on the losers. It amounts to cutting both your losses and your winners, when you should be cutting your losses and letting your winners run. Unless you let the potential winners work for you you will just have lots of losses.

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