Stop Loss Indicators

[Phaedrus]

Kizame, be careful not to confuse "Trailing Stops" with "Stop-losses". Trailing stops are used to lock in profits while stop-losses are designed to limit the loss you make should a stock drop after you have bought. You inquire about "Stop-losses" and Zito's excellent reply addressed that topic, but since you give an example of a trailing stop I suspect that is what you are interested in.

The simplest and most common method of setting a trailing stop is to use a fixed percentage. For example if a stock has peaked at 100, a 10% trailing stop would be set at 90. Every time prices rise, the trailing stop is raised accordingly. Trailing stops are never lowered. The actual percentage used needs to be varied according to the volatility of the stock in question and your own attitudes. Set it too low and you will give a lot of your profits back to the market when the uptrend ends. Set it too high and you run the very real risk of getting prematurely flicked out of on-going uptrends. It is possible to use back-testing to ascertain the optimum trailing stop percentage for any particular stock.

Another, slightly better method of setting trailing stops is by basing them on the "Average True Range" (volatility) of the stock in question. Details here :-
http://www.tradernexus.com/advanceds...ancedstop.html

While trailing stops might perhaps be regarded by some people as a "stand-alone" trading system, I have never thought of them as such. They are better than nothing, but generally you can expect them to underperform a more comprehensive trend-based system. Take a look at the charts I have posted on ST - almost invariably the trailing stop is the very last to signal an exit. I see trailing stops as a sort of backup - something to get you out of a falling stock in the unlikely event of all your other systems failing to signal an exit.

Trailing stops are useful if you are the type of person that is quite happy to hold on to stocks that are going sideways in a trading range. Trailing stops usually keep you in such stocks where most any trend indicator will signal an exit.

Here are some of my thoughts on setting stop-losses:- http://www.sharechat.co.nz/archives/...msg00554.shtml
The method is essentially the same as that mentioned by Zito.