Stops Introduction

In this section, we are going to talk about stops.

If you remember one of our setup goals is to try and manage the trade in a way where we can skew risk-reward in our favor.

That means risking as little as required, to see if the trade will work in our favor, all the while giving it enough room to breathe, so we don't get stopped out.

Below, I've shared where I like to place my stops for both day and swing trading. My goal is to show you what I like to do, and you can then pick and choose the pieces you resonate with, for your own variation of the setup.

If you'd like to follow my rules, I've detailed them below.

 

Day Trading Stop Loss Zone

For Day Trading, I like to choose the wider between the two for my stops:

1. The Volatility Box clouds
2. The Previous Pivot Low / High

The pivot point refers to the natural bottom (or top, for short setups) that results, after the Extended Keltner Channel wedges have finished printing.

If we use AMD as an example, we can see the cup pattern was formed inside of the cloud.

When we compare a stop outside of that pivot point to the outside of the Volatility Box clouds, the clouds are clearly the wider stop, and thus, the one we will use.

When I am trading, I always want to give the trade more room. Let it play out by itself without trying too hard. It is better to wait for a nice reversal than overcrowd it.

If neither the stop, nor target, is hit by the end of the day, then I will also use an end of day stop, to avoid any overnight risk.

 

Swing Trading Stop Loss Zone

For swing traders, you may have more room that you are willing to give the trade, given your longer time frame horizon.

On the other hand, the Volatility Box may be overlapping with the entry point on your longer time frame chart, and you don't want to give the trade too much more room.

In either scenario, it's important to have a plan of action.

If you aren't willing to give the trade much room, then using our Day Trading Stop rules are the ones to follow, with choosing the wider between the natural pivot point and the Volatility Box clouds.

However, if you have the longer term bias, your stop loss may be based off of:

• Previous support or resistance levels
• Previous trend beginning to switch (ie. bullish changing to bearish)
• Trailing stops as soon as the trade starts going in your direction
• Trailing with previous pivot points

In any case, it's important to have a stop strategy that you understand and can account for any of these scenarios.

So far, we've discussed the setup logic, entry criteria and stop loss zones.

In the next section, we'll focus on target zones, where we can start to take profits from trades.