Placing Protective Stops

	Tom Ventresca Market Edge.com
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The best method in determining protective stop loss levels is derived from cyclical analysis. Long positions are protected with Sell Stop orders (GTC) based on the previous cyclical low while short sale positions have Buy Stop orders (GTC) based on the stock's previous cyclical High. Locating the most recent previous cyclical low from the time a position was originated and deducting 1/2 of a point produces sell stops. In the examples below, a sell stop for AET would have initially been 46.50, ALD 13.38 and TRV 11.12. The stop should remain unchanged if the price of the stock moves adversely from its opening price. The stop should be adjusted upward as the price of the stock moves higher. The following charts show the adjusted stops as these stocks move up in price.

The following charts of GM and DIS depict the proper positioning of Buy Stop orders.

This technique of determing protective stocks is far surperior than the random percentage method. Cyclical analysis takes into effect the volatility of the stock as well as pinpointing significant areas of support or resistance that if violated typically point to a trend reversal. Neither of these factors are considered when simply using a 10% stop.

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