Look at Beta When Placing Your Stops

02/11/2014 10:36 am EST

Focus: TRADING

Anne-Marie Baiynd

President and CEO, TheTradingBook.com

Traders often have a tough time in determining where to place their stops and Anne-Marie Baiynd discusses why she thinks it should be determined by stop-specific criteria.

TIM:  My guest today is Anne-Marie Baiynd, and we're talking about setting stops in your trading so that you don't lose more money than you can afford.  Anne-Marie, talk about some of the best practices for setting stops.  I know it's a question a lot of traders have, where do I set my stop on my trade. 

ANNE-MARIE:  You know, I would love for that answer to be simple, but it's a little bit more convoluted because in the end it's a stock specific.  If you have a stock that's really noisy or if has a high beta, meaning it moves at a faster rate than the broad market, where you set the stops is really going to be dependent on how much the stock moves.  If I'm trading a utility with a beta of 0.5, meaning that it moves much less than the broad market, I'm going to be able to have a nice tight trade.  If I'm looking at a chart that's really breaking out and all of the sudden it's just left a really right tight channel and it's accelerating very quickly, I can look at that range of motion and see that I can have myself also with a tight stop. 

Many of us, we structure our trades to go, you know what, I'm only going to lose $300 on this trade but that means I'm going to have to buy X many shares because that just means 75 cent stop without regard to what the stock is.  Some stocks you only need a 15-cent loss, some stocks you need a buck fifty, so it's learning about the instrument that you're trading with, understanding, hey, if it breaks out here, what's it most likely to do?  How far is it most likely to come back? 

One of my favorite things to do is when a stock breaks out, I will look at the candlestick that breaks that relative resistance if we're going to the north, I'll look for that, and the length of that candlestick that broke my level, I will look just underneath it at the bottom of its wick, give it a little bit more room, and I will make that the stop, so it really becomes a function of how sharply it broke resistance or how sharply it will break support that holds. 

TIM:  So make it objective, not just something subjective. 

ANNE-MARIE:  Oh, absolutely. 

TIM:  How about like -

ANNE-MARIE:  You can't have flat things. 

TIM:  How about average true range or something like that?  Can I use something like that on a daily basis to find a place to, if the stock typically uses a dollar, I don't want to put my stop within that range because it may get hit to easily. 

ANNE-MARIE:  That's exactly right.  You can use that very well.  It's an easy way to have a system tell you what it's actually doing so that you don't have to really think through a whole lot.  In the end the more you think about that particular stop that you're using, the better it's going to be when you choose that stop. 

TIM:  Anne-Marie, thanks for your time. 

ANNE-MARIE:  Thanks for having me. 

TIM:  You're watching the MoneyShow.com video network.

Related Articles on TRADING