It is very tempting to lock in a profit as soon as it appears. And it is very annoying if one doesn’t do so and then still get stopped out – at a loss!! BUT, you have to allow sufficient space between the normal trading range of the share and your exit-stop price to let the share price have room to ‘breath normally’.
There is just no point in setting a very close stop price as soon as your trade moves into profit and getting stopped out at a small profit when a bit of patience and allowing room for the price to move normally (down as well as up) would have meant that a bigger profit would have been achieved.
It is very important to allow a profitable run to maximize otherwise there is little chance of accumulating sufficient profits to outweigh accumulated losses.
Setting stop-loss prices is a mix of art and science. It is vital to calculate a (momentum based) stop-loss price for each individual stock that is based on the volatility of that stock’s price. The idea, practised by many, of just using a fixed percentage from the last closing price is clumsy and likely to lead to bigger losses being suffered overall.
Seriously, the best way to trade is to put your stop into the market and not look at the trade again until you need to revise it! It is so tempting to ‘bank’ a profit – but this should not be done at the risk of getting stopped out too soon.
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