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Stop-Loss Orders & Trailing Stops

Most successful traders, especially swing traders, do not trade without stop losses. If you're having trouble setting effective stop orders on your trades, we're here to help.

Contents

    What is a Stop Order (Stop Loss)?

    A stop-loss order is an order to buy or sell a stock once it reaches a certain price. A stop-loss limits the amount an investor or trader may lose on any given trade. For example, setting a stop-loss for 11% below the price at which you bought the stock will limit your loss to 11%.

    What's a Trailing Stop?

    A trailing stop is an order type designed to lock in profits or limit losses as a trade moves favorably. Trailing stops only move if the price moves favorably.

     

    As the stock price rises, the stop price rises by the trail amount. If the stock price drops, the stop loss price doesn't change, and a stop order is submitted when the stop price is hit.

     

    As the stock price moves above the initial bid, the trigger price is reset to the new high minus the trailing amount. If the price stays the same or falls from the initial bid or highest subsequent high, the trailing stop maintains its existing trigger price.

    Take Profit & Conditional Orders

    Stop losses and take profit go together like bread and butter. Stop losses are a conditional order that sell your position if a certain condition is met. You can also set up conditional orders on the buy side, such as scaling into a stock as the price moves up or taking profit at certain price levels. 

     

    A take-profit order (T/P) is a type of limit order that specifies the exact price at which to close out an open position for a profit. If the price of the security does not reach the limit price, the order is not triggered.

     

    You don’t have to be at your desk to take that off and ring the cash register. The more you automate, the more freedom you have to step away from your desk. This is discussed further in Stop Loss FAQ Part I below ↓

    Stop Loss Strategy in Swing Trading

    If you aren't setting your stops, you aren't trading like an adult (yet). A swing trader's strategy needs to address stop orders.

    What is a Good Stop Loss for Swing Trading?

    Mixed answers online. Some say stop losses are suboptimal, others will tell you to never make a trade without one. 

     

    We belong to the latter. But, please heed this disclaimer: Setting your stop losses is an art, not a science. 

     

    Your stop losses will vary by the stock, the market conditions, and your trading style. 

     

    All that said, we set our initial stops pretty wide, usually 10% - 15%. As the stock runs up, we tighten the stop to 5% - 6%. If it keeps running up, we tighten our stop as low as 3%.

     

    This strategy gets us out of our losing positions quickly while preserving our profits on stock picks that make a run. 

     

    ** See Dutch’s original thoughts on this in the dropdown. **

    trader-z-transparent

    Why do I keep getting stopped out early?

    “You're probably too tight and/or trading too large. Cut your size down, trade smaller, broaden out your stop.

     

    And remember, as you scale in 4 or 5 times, you have move your stop up real tight. If you don't, you risk giving all your gains back because you've melted up into the position.”

     

    -Trader Z

     

    Trader Z's full response in the Stop Loss FAQ 1 is well worth your time, give it a listen ↓

     

    Stop Loss Tips from Pro Traders & Investors

    See below for examples (both good and bad) of traders using stops in their strategy.

     

    All quotes are pulled from our PRO Trader Calls - videos are linked below

    powell fisher

    Powell

    “I buy a stock and if I get down 3%, I’m nervous. Maybe that’s too tight, but at 5% I’m definitely gone. Maybe you overtrade doing that, but at the same time I try not to let a loss get real big.”

     

    Powell also practices incrementalism, as pointed out by Trader Z. 

     

    “Let’s say Dutch sees something and is scaling in. And I decide that I’m going to buy 5,000 shares. I’ll start with buying 1,000 and then I’ll keep averaging up. But then once I’m all in on that mental number (5,000) and it paused, now I’m watching it like a hawk. If it drops 3% into my principal, I’m definitely getting nervous. But if it keeps going, I’ll give it a little more room.” 

     

    -Powell  F

     

     

    Roger

    “If you’re going to leave your computer, you’ve got to set some stops. And how you set those stops is an individual process. You have to take into account the volatility of the stock, how much it is moving on a daily basis, how long you are going to be gone, etc. If you’re going to be gone all day, take a look at the daily volatility, pick some highs and lows, figure out the percentage and set your stop.”

     

    Two weeks later, Roger shared a great example of why trailing stops are so important. 

     

    “When I enter a position, I immediately set a stop to protect myself from a certain percentage loss. In the case with MARA, I didn’t adjust the stops going up, and that thing can move 10% in an hour or two… I’ve started thinking highly of trailing stops because they’ve saved me a few times. I like to go to the gym and play golf, and trailing stops are essential when you aren’t going to be at the computer trading all day.”

     

    -Roger E

    roger smiling laughing
    carnivore-trading-dutch

    Dutch Masters

    Guys like Dutch need discipline around stops, or else this happens.

     

    “I shorted semiconductors with the inverse etf in August of 2023. I was wrong, and it went against us. And instead of stopping out, I doubled down. Which is all ego. 100% fucking ego. I wanted to be right more than I wanted to make money. It’s a trap every trader falls into eventually…

     

    It’s kinda like the smarter you are, the dumber you are when you first get into trading. You’re used to being right… the market is going to tell you you’re wrong half the time even if you’re amazing at this… that’s a change for the smart guys…

     

    That’s why stop losses are nice. They take the emotion out of it. Nothing prevents you from getting back in to a trade later. “

     

    -Dutch Masters

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    Determining Your Stops (Videos)

    This question comes up often so we've discussed it often. For our full thoughts on stop loss strategies in swing trading, check out Part 1 & 2 below.

    Stop Loss FAQ (Part 1)

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    Stop Loss FAQ (Part 2)

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    Don't Stop Learning Now

    Friendly reminder that we are not advisors and this is not advice. But enjoy these bi####n' resources related to your swing trading strategy.

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