Stop Placement using correct Money Risk Management principles and Static Position Sizing. To survive as a trader or investor you need that professional "edge" or you are destined to fail. That edge is implementing correct Money Risk Management principles in your trading decisions. The professionals use them and you should too. What I am sharing with you here today is not anything new but a sophisticated strategy used by professional traders and investors globally in all market conditions for many decades.. All I am doing is trying to simplify these principles for you so that you can understand them and have the confidence to implement them in your trading and/or investing. I will begin with Risk Management or Stop Placement. This should not be confused with Money Management or Position Sizing. The professionals use various technical analysis techniques that are "invisible" to the majority of novice and seasoned traders. Have you ever felt that the market always seems to "know" exactly where your stops are? Have you been frustrated by the market triggering your stop, and then rebounding back in the preferred direction of your original trade? Sometimes known as whipsaws. Perhaps sometimes you feel that the market was intentionally "gunning" for your stops? The bad news is... They are! Stop Running also known as Stop Gunning is a common technique employed by Floor Traders. Definition: Stop-running or Stop-gunning (both terms are used) occurs when a share price is pushed through a support or resistance price level in order to trigger the stops that are hiding there. After the stop supply is exhausted, the market bounces back in the other direction, usually winding up where it was before the process began. Professional Traders know where your Stops are so where should you place your initial Stop Loss? Your stop loss acts as a trigger and is a price level at which you will exit the trade. This price level should be determined prior to the trade being opened, where possible. The stop loss is the point at which you will exit the trade "no questions asked". A stop loss will help preserve your trading capital to make sure you can trade another day. Remember, a stop loss is simply a mechanism which signals the exit of a trade. A price level where you must take action and close that trade first opportunity and move on to trade another day. Here is a typical example of how you could calculate your stop loss.... John has decided to buy $20,000 worth of "XYZ" shares using a portion of his current $50,000 (the author would not risk more than 20% of his Trading Capital in any one trade e.g. $50,000 x 20% = $10,000) and has decided not to risk more than 1.5% of his trading capital on the trade. The current share price of "XYZ" is $2.00, so John calculates that he is only going to risk $750 on this trade (1.5% x $50,000). He buys 10,000 shares of "XYZ" at $2.00. (The author would also allow for any brokerage fees to be incorporated in this calculation) John calculates his initial Stop Loss for this trade to be $1.925 (($20,000 - $750) / 10,000), giving the trade enough movement to meet the trade's maximum risk and still optimizing the core trading capital and if this stop is hit the maximum loss will be $750 and John would immediately close this trade and sell his holding in "XYZ". A trailing stop loss is a price level which moves in accordance to the share price (Author prefers to use an 8 period ATR (Average True Range) Volatility Indicator with a 10 period EMA applied or a 10% drop in price for medium term trading. If you can imagine the share price constantly rising, you would want to protect some of the unrealized profit. You can do this with the use of a trailing stop loss, the same concept of a stop loss still applies. That is, the trade is immediately exited when the current price reaches the trailing stop loss price. The most important thing to remember about any stop loss is its importance in signaling an exit point where you must act and close that open trade. Many believe the exit is far more important than the entry. Always protect your trading capital to ensure you have the capital to trade another day! After share trading, educating and selling various forms of Technical Analysis Stock Trading Software both to novice and seasoned traders for over 10 years I found both Technical and Percentage Stops were being placed in or around the same price level by the majority of traders and investors. These were triggered and trades closed normally just before the share price rebounded back in the preferred direction. These Stop Loss price levels were generally near major support and resistance or when looking at market depth at key 0 and 5 price levels. E.g. $1.10, 2.20, $1.85, $2.25, etc. so I researched and found a Stop Loss Placement strategy that would control the risk I was exposed to but would still best optimize my trading capital. It produced a far less frustrating result and also prevents over trading by best optimizing your available capital. The strategy I use is based on 2 very important rules. The first is to never risk more than 2% of your trading capital on any one trade! The second rule is limiting trade value for any one trade to a maximum of 20% of your trading capital, allowing for brokerage. e.g. I have $25,000 in Trading Capital, last close of the company share I am interested in purchasing is $10 and I am allowed to allocate a maximum of $5000 (20% x $25,000) on this trade, brokerage is $50 each way ($100 round trip) so my maximum risk of 2% is $500 less brokerage = $400 so I buy 470 shares @ $10 =$4,700 + $50 brokerage = $4,750 and set my stop loss at $9.15 risking 85c per share or 8.5% so if my Initial Stop Loss is hit I have lost a maximum of $500, which includes my brokerage. ($9.15 x 470 shares less $50 brokerage is $4250.50 from $4750 is $499.50) This makes determining your Stop Loss price level harder to determine by the market as it is not based on Technical Analysis but by correct Money Risk Management principles and your current trading capital. These values and many more are all calculated for you automatically with JBL Risk Manager version 8 (JBLRM8) and I urge you to trial it for yourself. It's very simple to use, includes a user friendly operation manual (PDF format) and is available from resellers globally, including Equis or please visit my website. A Spanish version is also available from my webssite. Joseph www.paconsulting.net.au Trial JBLRM8 for simplicity, accuracy and stress free trading and reporting.