Managing Stop Losses for Breakout Trades 

Content Details 

• Summary: This article explains the importance of setting and managing stop losses for breakout trades. It emphasizes the need for quick action if a stock falls back under the trend line or breakout point, and discusses different stop loss strategies, including fixed dollar amounts and percentage-based stops. 

• Target Audience: Intermediate traders who have experience with breakout trading and seek to improve their risk management techniques. 

Expanded Response for Trading Hub Analytics 

Quote: "Be very quick to sell your stock should it return back under the trend line or breakout point. Usually stops should be set about $1 below the breakout point. The more expensive the stock, the more leeway you can give it, but never have more than a $2 stop loss. Some people employ a 5% stop loss rule. This may mean selling a stock that just tried to breakout and fails in 20 minutes or 3 hours from the time it just broke out above your purchase price." 

Expanded Response: 

• Definition: Setting a stop loss involves placing an order to sell a stock when it reaches a certain price, thereby limiting potential losses. This is crucial in breakout trading to prevent significant capital loss if the breakout fails. 

Stages: 

• Identify the Breakout Point: Determine the price level where the stock has broken out from a pattern or trend line. 

• Set the Stop Loss: Place a stop loss order slightly below the breakout point. This can be a fixed dollar amount (e.g., $1 or $2 below) or a percentage (e.g., 5% below the breakout price). 

• Monitor the Stock: Continuously watch the stock’s price action to ensure it remains above the breakout point. 

• Execute the Stop Loss: If the stock price falls to the stop loss level, the order is triggered, and the stock is sold to minimize losses. 

• Example in SPX: Suppose SPX breaks out from a resistance level at 4450. You set a stop loss $1 below the breakout point at 4449. If SPX falls back to 4449 or below, the stop loss order triggers, and the stock is sold to prevent further loss. For a more expensive stock, you might set the stop loss $2 below the breakout point. 

• Practical Application: 

Trading Strategy: 

• Fixed Dollar Stop Loss: Set a stop loss $1 below the breakout point for most stocks. For higher-priced stocks, use a $2 stop loss. 

• Percentage Stop Loss: Alternatively, set a stop loss at 5% below the breakout price. 

• Immediate Action: Be prepared to sell quickly if the stock price falls back below the breakout point. 

• Adjust for Volatility: For more volatile stocks, consider a slightly wider stop loss to avoid being stopped out by normal price fluctuations. 

Risks: 

• Whipsawing: Frequent small fluctuations might trigger the stop loss unnecessarily. 

• Gap Downs: Stock prices might gap down below the stop loss, resulting in a larger-than-expected loss. 

• Indicators for Managing Stop Losses: 

• Volume Analysis: Confirm the breakout with high volume to reduce the risk of false breakouts. 

• ATR (Average True Range): Use ATR to set stop losses based on the stock’s volatility. 

• Moving Averages: Monitor moving averages to determine the overall trend and adjust stop losses accordingly.