After the initial stop-loss is set, the next stop-loss order to use is a break-even stop-loss. After you have entered into a position and have your initial stop-loss protection in place, your objective would naturally turn toward implementing a superior exit strategy to use when the trade is earning you money. The first step toward exiting a winning trade is to protect your profits by moving the stop-loss order to your entry point.
With a break-even stop, you are in a sense catching a free ride on the tail of the market, and the worst-case scenario is nothing lost, except for commissions. A tightened stop-loss does increase the possibility of being prematurely stopped out while the trade still has a shot to meet your original objectives, but you can always get back into the position. The break-even stop-loss provides peace of mind along with a sense of detachment. When the trade is working and the break-even stop-loss is in place, you have successfully created an opportunity with little or no cost to you.
The best time to raise your stop-loss to the break-even level is subject to individual trading styles. A guideline that seems to work well when adjusting stops to the break-even point is the 1 percent move. The \x/i percent move suggests that you should adjust your stop-loss to break-even after your position has moved at least ll/i percent above your entry point. For example, assume you bought DELL at 50 and your original stop-loss was 49. When DELL moves IY2 percent above 50, or 3/4 points to 503/4, you should slide your stop-loss up to your entry point of 50. The IV2 percent adjustment yardstick is useful because it can be applied across the board to broadly ranging prices. It is recommended that for lower-priced stocks, the minimum move before raising your stop-loss to breakeven should be at least 1/2 point. For example, a IV2 percent move in a $25 stock is approximately 3/8 of a point. In this case you would wait for 1/2-point move first before using a break-even stop-loss.
The IV2 percent break-even parameter is meant to be flexible according to each trader's individual style and comfort level. Some traders raise their break-even stops immediately after the stock has moved 3/8 of a point in their favor. Others wait for a move of at least $1 or more. Experiment with this parameter and utilize its psychological advantage.
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