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The Hidden Secrets of Successful Stock Market Trading Rules - Fine-tuning Your Stop Losses
David Jenyns

There are two cardinal successful stock market trading rules

that I am sure you are quite familiar with by now.

The first of the two most common stock market trading rules are
to cut your losses short. The second of the two most common
successful stock market trading rules are to let your profits
run. However, you can take it one-step further by fine-tuning
your trailing stop losses, and becoming more risk seeking once
your stock is in profit. Increasing your risks, at the right
time, can allow you to get all the profit you possibly can out
of your system. You may wish to test the effects of these
successful stock market trading rules by having a wider trailing
stop loss than your initial stop, and see how this is reflected
in your system.

For example, you could set your initial stop loss at two ATR but
set your trailing stop loss as three ATR. This allows the stock,
once it`s in profit, a little bit more room to move. You`re
still limiting your risk at the beginning of the trade by
keeping a tight stop loss; however you`re going to become risk
seeking in a profitable situation. That is to say you`ll be
willing to risk more once you`re already in profit.

Personally, I think this is one of the many successful stock
market trading rules you can use to take it a step further than
most people are willing to go. With this strategy, I also mix
and match my stop loss methods. For example, in one of my stock
market trading rules, I set my initial stop loss at 2.5 ATR, but
my trailing stop loss is calculated using a completely different
method. I use what`s known as the lowest low stop. The way this
stop loss works is you find the lowest low in the last X number
of periods, and base your trailing stop loss on it.

Now, for that trend following system, I actually find the lowest
low in the last 40 days. I then position my stop one cent below
this low. It`s almost as though it`s consulting the price action
itself by identifying where the lowest low is, and this can be
highly effective. Many times my stop has been set one cent below
a support line.

The way this trailing stop loss works is that on each day a new
trading day is added to the chart, and one of the old days drop
off. I then find the lowest low in the last 40 days, and
reposition my stop at that point, if it needs to be
repositioned. This stop has been extremely valuable for me, and
it may be a stop loss that you may want to consider testing.

But, before you go looking for that perfect trailing stop loss,
realize that in it`s own way, it`s very similar to the initial
stop. There is no perfect stop that will guarantee to get you
out of the stock at the perfect time, and save you the most

Sometimes it will work for you. Other times it won`t. The real
key and secret of having a stop loss and an initial stop do
their best for you is not how you calculate it, it`s just having
them in place.

You need to find an initial and a trailing stop loss that you`re
comfortable with. You also need to understand how they work so
that the actions they direct you to take makes sense to you. How
do you find a stop that you`re comfortable with?

Test them. Pick out a whole lot of charts of stocks that you`ve
been looking to trade, and marking where you would receive an
entry signal, set various initial stops and trailing stop
losses. Progress through the trade, revaluing your trailing stop
loss and see which one works the best.

Often successful stock market trading rules are designed with
simple concepts that works best at this point. When you base
your system on understanding, rather than optimization, you are
more likely to stick with it. If you can come up with a good,
straightforward set of your own stock market trading rules, you
will be able to apply it across a number of markets on most
trading instruments. Really, when designing any system around a
set of stock market trading rules, all components should apply
to this same principle. You want to keep things as simple as
possible, that way it`s robust and can be applied to any market.
As long as you follow this underlying principle, you`ll be on
the right track.

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