Tuesday, May 15, 2007

Determine your stop position before you enter a trade

An excerpt from the following:
Tune In ConocoPhillips' Predictable Channel
By Dan Fitzpatrick
RealMoney.com Contributor

5/15/2007 11:00 AM EDT

URL: http://www.thestreet.com/p/rmoney/technicalanalysis/10356847.html
Rather than determining your stop after you decide to buy, I think you should decide to buy only after you have determined where your stop is. As a function of discipline, most traders define risk before entering a position rather than saying, "If it's flyin', I'm buyin'!" and blindly jumping in. They'll base the position's stop on a known parameter such as congestion or a key moving average. The method of setting a stop differs for each trade but however you do it, you're determining the price where you believe sufficient buying interest exists to halt any decline. But by starting with the stop, you can decide before you even enter the trade whether the stock is in a good position to buy. Is there a trade? If the market price is too far away from the best stop level, the trade isn't likely to work -- so don't take it. Instead, remain patient and wait for a better entry or move on to the next trading opportunity. Only take the trade if the price is sufficiently close to your predetermined stop level to present an acceptable risk profile. .....................................
The next time you consider buying a stock, take some time to make an unbiased determination of what price level the stock must trade to in order to put the uptrend in serious doubt. Then compare that level with the current price of the stock. If the difference between the two is small enough to warrant a trade, take it. If not, then respect your trading capital and take a pass.

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