Dear Bella,

Where would your stop loss be for the lot you added when the sellers won at 76? More importantly, how does one determine the right spot to place your stop loss or your “line in the sand”, so to speak?

I also traded BIDU today and I had 76.50 and 76.00 marked as key levels. I missed my short at 76.50 and I was waiting for another short trade if the stock gets below 76. More specifically, I was waiting for sellers to come in and hold the offers at or below 76 to get short. I would get out if the stock trades gets above 76.00. If the stock trades in my favor, then I will exit only if I see a Reason to Cover. At least, that was my OGT. When the sellers initially won the battle at 76, the stock traded down to around 75.20ish but then got back above 76 again, and I exited for a loss, as per my trading plan.

I took the SMB Foundation program a couple of months ago, and as I recall, I was trained to exit whenever the level I’m leaning on is violated. I realize that simply hitting/paying whenever a level is violated can lead to shakeouts pretty often, so I’m working on giving my trades some breathing room. The question is, how do I determine how much room to give my stocks to avoid getting shaken out while at the same time, protect myself against large losses?

Bella Responds:

These are the plays to master. After the close these trades that work best must receive most of our attention. We must review them and find places to add size while controlling our risk. So I love how you are reaching out to me about this set up. Because this is one that will pay the bills.

We are all different. We have different buying power and trading experience. A different tolerance for pain. We process information differently. The set ups that make the most sense to us, our A trades, our different.

For me the add at 76, had a stop of half above 30c and the the rest if BIDU held above 76.50, since this was the important long term technical resistance level (or right above 50c if it didn’t look like it would hold there on the tape).

But the key to this exercise is for you to go back and determine the best stop for you. I was holding until the next significant technical support area. Your play might have been a shorter time frame. If so your stop might have been tighter.

Mike Bellafiore
Author, One Good Trade: Inside the Highly Competitive World of Proprietary Trading (Wiley)