Initial stop-losses can be placed in many different areas. Depending on why you entered a position, the initial stop-loss will ensure that your original thought process remains intact. When a trade is initiated, a stop-loss should be placed immediately. There are various technical levels to place a stop, but a general guideline for long positions is that the initial stop-loss should be placed 1/8 point beneath the previous day's low. For short positions, the initial stop-loss should be placed 1/8 point above the previous day's high. Only after you choose an initial stop-loss can you take the steps, described in Chapter 2, to determine your proper position size.
The previous day's low and high prices represent the first technical price levels of daily support and resistance. Yesterday's low or high point was the furthest that the bears or bulls could push the stock before it changed direction. Stops tend to accumulate just below or above these price ranges. A move through the lows or highs of the previous day may trigger stops and tend to clear the path for further momentum. If, for example, Dell Computer is 40 bid and yesterday's low was 3872, your protective stop-loss order should be placed at 383/s.
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