Stock Trailing Stops Q&A   View Select Entries from Our Mailbag. Also See Our Q&A Page.

Q: 10% to 12% of the price of the stock or the daily ATR or exactly what?

A: Initial stop should be placed at max 10% below the purchase price of your position. In uncertain markets like now, we will exit a position quicker - maybe even 7% or 8 % below your purchase cost. Cutting losses short should be the #1 rule that you follow. Remember, you can always re-purchase if the stock shows strength again and it breaks out once more.

Q: Thank you for your reply. I've been using either a .12 or 1.5 times daily ATR stop formula and get stopped out quite often. I'll work with your suggestion to see if that improves my ability to allow profits too run longer. I recently avoided the .12/1.5 daily ATR and used the overall ATR (1.89 at the time of entry) method on NFLX that I picked up on a pull back to the $34.83 price. That trade worked well when I used a more liberal stop.

I typically look for stocks inside sectors that are both in up trends and follow closely to the S&P's movement. I also restrict my stocks to have a daily volume of one million plus, with an overall ATR of a $1. 00 or better, priced between $15 to $30.00, and sometimes use [xxx] as a source for potential ideas. After a little more work, I'm planning on choosing a broker and using a direct access trading platform.

I enjoyed your explanation of Pivot Points because I had a misunderstanding of its function. I thought Pivot Points established a new overall support/resistance line, I now understand that they are for the daily range. How do you feel about waiting for a stock to reach R-2 or R-3 / S-2 or S-3 with confirmation before initiating a trade?

I will still draw my support and resistance lines myself (or allow the Fib function to help confirm my placements) and use Pivots to establish a daily trading range.

While I'm not new to stock investing, I'm very new to trading which is a large night and day difference. My trading/business plan is slowly coming together, after numerous revisions of course.

A: I''m not sure what you mean by R-2, R-3 / S-2, S-3, but we don''t wait for any pullbacks before initiating a trade. We generally buy the breakouts when they happen. Also, you might want to use a larger ATR (4x) if you get stopped out too much. 1.5 is too tight.

Our strategy is much simpler - we try and sell the bulk of our winners at a 3 to 1 strike rate, i.e., if our losers average -8% to -10%, we want our winners to average 25% to 30%. Of course, we like to see a few home runs in our portfolio as well. Picking the right stocks is one aspect - effective portfolio management is probably as or more important.

Finally, we try not to trade short term. Our ideal holding period is 2 to 6 months or more. It takes time to make decent money. In our experience, trading more frequently diminishes returns.