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Trying to figure out the best stop loss when day trading is always a hard thing, even for more experienced traders. One thing is most certain, those traders that consistently do not use stop loss orders face almost a 100% chance of losing a significant amount of money, if not all of it. Even the prudent use of stops, if they are placed in the wrong area, will result in consistent losses no matter how good the stock idea is. In addition, adding positions before market moving news events occurs can assure increased volatility and increased odds of stopping out.
The main thing to keep in mind is CURRENT MARKET CONDITIONS - I cannot stress this enough. Do not pay attention to what the indexes are doing, it is what many stocks over various sectors are doing overall and how they are trading in general. What is the general volatility level for the day, is stuff trading slow and steady or are they whipping up and down quickly on a slight move in the futures market? This makes a huge difference is not only your stop, but the risk level involved. Most people assess risk by the amount one can lose when day trading or swing trading. What most people fail to think about is the actual odds of that loss happening.
While there is no sure fire way to figure out odds, if you watch what other stocks are trading like you can get a pretty good idea. If current conditions are calm, you can usually use a smaller stop amount and still have decent oddsit will not get hit. When more volitile conditions are present, using a smaller stop is a really bad idea because of the significantly higher odds that even a smaller than normal oscillation in price will hit your stop.
The way you figure the odds in a stop happening when day trading is somewhat straightforward. Look at the average range high to low over the last 20 minutes. Do not pick a very calm period of time, as this calmness tends to lead to increased and unpredictable volatility. If the price action currently is very flat and calm, go back on the chart to a more volatile time of the day or prior day and then figure out the range. It does not have to be exact, an approximation is fine. Once you have this range, that is your maximum risk.
What the best thing to do is to try to lower the max amount to a much lower level. This can be done 2 ways. The first way is to study the pattern of trading behavior for that stock locallly when it reaches a prior high level - does it normally fade back or does it have momentum and push through? If it starts to push the last few times it reached a high turning point, then it is probably ok to buy the stock on strength. If it tends to fade or try to sell, better off to see it push, then put your order 1/4 of the range you computed earlier, lower than the high its at now. So if the price range figured was 1.00, and the stock was at 40 now, you would put your order at 39.75 to put on a long. You will most likely miss some trades doing it this way, but have to ignore the urge to chase the prices. If the pattern is on a lot of names (by eyeballing) you have to be especially careful.
A second way to remove some of the risk is to split your entry order into 2 different parts. So if your trade size you want is 500 shares, just buy 200 shares now. Wait until it pushes a decent amount up (meaning it has pushed enought that it has moved past the fade the breakout move area), then look to add the other 300 on a 5 or 10c dip. Move your stop price up higher .45 now (assuming you had a 1.00 stop to start) on all of it. The other alternative, if the market tends to fade the push moves, is to buy 200 shares now, then put the balance of your order .25 above your stop (assuming it is 1.00). The max stop remains the same on all shares. The difference here is if market conditions get poor for going long when day trading for a period of time, you are going to lose a lot more averaging when its selling because you will get filled on the add, then stopout 2 minutes later on all of it.
The way around this is to simply cut back size - when the market gets unpredictable, play ONLY 1/2 normal size or less until it starts to act more predictably. The name of the game to being more profitable is to preserve capital with stops, and secondly to place the stops in the right way to avoid making a loss too easy for the market to hit. While its impossible to tell when conditions improve unless you are actually trading, there is nothing wrong with playing less shares until you see it look better over time.