My Stop-Loss Framework Explained Using SPY
Plenty of different opinions on stop losses. Should you use a hard stop? mental stop? where do I place it? All good questions. I'll add *my opinion* to the mix.
I'm primarily a swing trader. Most of my stops are mental nowadays. And If I do plan to stop out...it's in the last 10 minutes of the trading day or week. Here's why:
Because I'm waiting for larger timeframe candle closes (fancy way of saying: how do the daily + weekly candles close?). So I typically won't stop out until I see a daily or weekly candle close below my level right at EOD.
With the trickery, choppiness, and liquidity grabs of the current market, I often see my level broken, and then recovered (+ more, by EOD). Look at $SPDR S&P 500 ETF Trust(SPY)$ below for example. Daily candles failed to *close below* previous local low...which didn't meet my stop out criteria & both times it recovered.
Other important part of my stoploss criteria is defining support + resistance levels...and if a higher timeframe candle close breaks that level, I exit before the end of that day.
I try to keep it to a simple combination of S/R levels + longer timeframe candle closes.
Two keys/caveats...
> this only works because I size for volatility + rubber banding of key levels
> the level is defined before I enter, so I'm not acting on emotion
Plenty of situational nuances but this is my general framework for stopping out.
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