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In the process of learning tricks of stock trade, one of the most important aspects you need to learn is the basic protective stops strategies. These are: recognizing the basic trend, the basics of long and short setups, and when to trade based on day trading strategy and where to place stops. Once you know these basics, you are ready to protect profits and limit your losses by adjusting your stops. These stops are:

The Original Stop
Your original stop to a purchase is just below the previous day’s low by 1/8 to 3/16 for a short. If the price is just off the whole number, you have to place stop 1/8 on the far side of that price.

For instance, if you are looking for a stock at 40 1/8 and 38 1/8 is the previous day’s low, you need to place stop at 37 7/8 so that the whole number 38 would serve as support. You need to place it 1/8 below 38 because it can break it by 1/16, though typically breaking it by 1/8 will signify that the break is real.

The other original stop is employed if the gap past the original entry point and where you apply a 30 minute rule to enter a stock. In cases of a buy where the stock is up 1/4 above your buy price and entered it when stock broke the 30 minute high, then you need to use 1/8 to 1/4 below the previous day’s low when the stock sets up as the stop. Make sure to adjust the 1/8 to 3/16 according the volatility of the stock.

Protecting Profits
The first thing one need to look in a stock is a place where to protect partial profits. Mostly partial profits are selected after a huge price movement mornings or in the last hour of the trading day.

Usually this is used to cover the stop. The rest of the stock position is generally held until your expectations are attained.  Another method to take these partial profits is, generally after large moves in a short time.

After a huge move, you will see a pullback. Sometimes it’s short-lived; sometimes it serves as the best stock price of that day. In order to optimize the move, investors want to get out of partial shares when moves appear to be nearing the end. Often such pauses occur at resistance and you should protect partial profits at the first and second time.

Trailing Stops
Another type of stops is those called trailing stops. These stops are used to protect profits. Let us discuss them in terms of a buy. You will find them just opposite when dealing with a short. One of the trailing stops people use, is a break in the 15 minute 20 moving average.

This means that when an entire bar trades on the other side of the 20 ma and closes at a point, that closing price is the price we start our stop.

This discussion on protective stops strategies will reduce your chances of repeating the mistakes and enable you to utilize the day trading strategy.