7 Deadly Sell Stop Mistakes You Might be Making

Stop losses have been the key to my trading success.  To me, they are way more important than entries, which is what everyone seems to focus on.  

In the past, when I didn’t use stop losses properly, my trading account suffered.  Sometimes when I didn’t even use sell stop losses at all, I got absolutely blown out, not wanting to admit that I made the wrong trade.  

I’ve learned the hard way that the key to trading is to live to fight another day.  Focus not on making money, but not losing money.  

After all, if you blow out your account, you can’t trade…game over.  Don’t worry, if you have a half decent trading strategy, you’ll have your winners.  But it’s the big losers that will cost you your ass.

Let me know what you think, including what has worked for you!

I have some images below for ticker symbol TROY that I will be referring to.

Chart 1: with a support line at $88.71 that I feel was going to hold for a swing trade reversal.


Chart 2: This shows the actual movements during the day that are hidden within the candles above in Chart 1.

1: Don’t place them at whole numbers or easy to guess areas

I’ve never liked placing my stops at whole numbers like 20 or 35.  Also, don’t use numbers like 20.75 or 35.50.  Why?  Because they are too easy to guess.  Market makers know that lots of people put their stops at whole numbers, so to get more trading volume that puts money in their pockets, they’ll gun for those whole numbers, knowing stops must be there.  The stops get executed, the trades happen, more trading volume for them to make money!

Place your sell stops slightly away from whole numbers like 19.94 or 35.57 so you you can to eliminate getting stopped out at whole numbers, only to watch the stock recover right back above and leave you without any shares as the stock moves higher.  

2: Don’t place your sell stops too tight

Look at that huge red candle.  I drew that support line the day that red candle occurred, expecting a bounce up.  Look at the support line I drew at $88.71.  The next day, the stock opened at $88.55, had a high of $89.30 and a low of $87.45, ending with a close at $89.05.  The chart below shows the activity of the trading activity contained in the candle after the big red day.  That would be the day to get in the trade.

What would have happened if you bought the $88.00 and put in your sell stop at $87.50, for a .50 cent per share loss.  In the chart above, the blue arrow is the buy at $88.00 and the sell stop is in red at $87.50.  You are certainly protecting yourself, which is good, but that was too close.  The low of the day ended up being 87.45.  You would have been stopped out, had your shares sold and patted yourself on the back as you watch the stock go to $87.45.  

Look at what happened though…that was the floor at $87.45 and you would have watched the stock move sharply higher, without looking back. 

Setting your stop so very tight like like this will lead to:

  • High commissions because you are creating more transactions.
  • Not allowing your trades to “breathe”.  After all, technical analysis isn’t exact, and stocks don’t turn at the very exact technical points on a chart.
  • Robbing yourself of profitable trades, where you were right about the eventual direction of the trade, but ended up being out of the stock as it eventually moved higher…with nothing to show for it!

3: Don’t place your sell stops too far away

When you place your sell stops far away from your purchase price, you are sacrificing too much.  With a swing trading system, you do need to allow trades to “breathe” by giving them some space to do what you intended, but sometimes you end up with too much of a good thing!  

Having a wide sell stop does help with your positive expectancy, meaning your percentage of wins will be higher, because you stayed in a stock that should have been sold but didn’t…and then the stock moved higher.

In my opinion, risk management, and position sizing is much more important than the entry.  Swing trading is all about managing risk.  A swing trader that risks too much by having wide sell stop won’t be a swing trader for long.  Limiting your losses it the key.  Avoid big losses, since it takes so much effort to recover from large losses.

Look at this basic scenario below showing how not losing money is more important than making money.  A 10% loss is much worse than a 10% gain.  They are not equal.

Let’s say you have 3 back-to-back losses of 10% on your $10,000 trading account.

You are now at $7,290:

  • 10,000 – 1,000 = $9,000
  • 9,000 – 900 = $8,100
  • 8,100 – 810 = $7,290

Unfortunately, you need more than 3 trades of 10% to get you back to even.  To recover your losses, If you had 3 positive trades of 10% that were compounded, you would only be at $9,702.99.  You are still down 3% from your starting point.

  • $7,290 x 1.1 = $8,019
  • $8,019 x 1.1 = $8,820.90
  • $8,820.90 x 1.1 = $9,702.99

The power of compounding works against you when you have a loss.  A 10% loss is not the mirror opposite of a 10% gain.  It’s worse.

4: Don’t set your sell stops based up a specific dollar amount that you are willing to lose within your account

Let’s say you have a $20,000 trading account and want to enter a trade, going all in on TROY, where you would want a maximum loss of $1,000.  That would be a 5% potential loss (I would say 5% is way too much to risk, but I can cover that sometime later).

Ok, look at our example with TROY.  

  1. You buy 227 shares at a price of $88.00, which is $19,976.  
  2. A loss of $1,000 would mean you would be at $18,976.  
  3. $18,976 divided by 227 shares equals a price of $83.59.  Using this method, you would place your sell stop at $83.59.

Technically, is $83.59 a good place to put a sell stop?  It’s not a round number.  It’s not too tight, that’s for sure!  Aside from the fact that is is obviously way too much to risk, this ends up being a completely arbitrary stop!  

  • In this case you end up putting a stop in a wasteland.  
  • Obviously by the time the stock hits that point, you were wrong.  

5: Don’t base your stop loss on a PERCENTAGE loss either

Just like picking a stop loss price based upon a dollar loss, don’t use a rigid percentage loss either.  It’s the same concept…you are basing your sell stop on an arbitrary and artificial standard that you are placing on yourself for a particular trade.  

Let me also clarify further regarding a percentage loss:

  • You can set a stop loss based on a percentage loss based upon how much you are risking on your TOTAL account balance.
  • You can set a stop loss based upon how much you are willing to risk on a particular trade.

Both of them are completely arbitrary though!  Don’t base your trade on your own fickle parameters that you set upon yourself.

6: Don’t move or cancel your sell stop loss as the stock approaches it

Wow, this one is very important!  It’s almost as bad as not using a sell stop at all.  At least you had good intentions when you entered a trade by setting a sell stop…but moving it and cancelling it altogether after you are in the trade is a recipe for disaster.

Make no mistake, I’ve done this.  I was as guilty as the next guy in doing this.  

Moving or cancelling a sell stop is bad for so many reasons, but the major ones are:

  • You are increasing your risk!  Live to trade another day.  There are tons of swing trades out there, waiting for you.  If it hits your preset sell stop, just forget about it and move on.  It served it’s purpose by limiting your risk.
  • You are basically saying that you do not want to admit that you might be wrong on your trade.  That’s fatal.  Next thing you know you’ll have a position in a losing stock for months.   What’s next, listening in on earnings conference calls and getting 10k’s in the mail?  I’m a swing trader, not an investor.
  • Time is money.  You are wasting your time in a stock has declined further than you were initially willing for it to fall.  It might recover.  You might hold on long enough for you to make a profit.  But how much time are you wasting?  You could be in a better trade.  Move on.  

7: Don’t use sell stop LIMIT orders

The standard sell stop is a standing order that has a set price.  When the stock hits that price, it turns into a market order.  That means your broker is now ordered to sell your shares at the market, for whatever price they can get.  That has it’s disadvantages because you might not get the best price.  However, you are now out of the stock.

A sell stop limit order means that it becomes activated when the stock trades to that preset price, but now has certain price (a limit) or better, that you will allow your shares to be sold.  This is great, because you can get a better price.

Let’s say you buy a stock at $50 and set a sell stop with a limit of $48.  What if the price ends up falling  rapidly one day, slicing through $48 in a few seconds and then continues to drop to $46 and some change.  Or bad news comes out after the bell and the next morning is trading below $48?  It’s now trading around $46.  You still own the shares.  You weren’t able to get out at $48.  Now you have an even bigger loss of $4 a share, not $2.  Your order is now activated, but it has the limit of $48, so unless the stock recovers to $48 or better, you are an owner.  

Who knows?  Maybe it recovers…maybe it won’t.

I’ve set-up these types of orders and sometimes it has worked in my favor, sometimes it hasn’t.  Many times, I’ve ended up holding on as my stock sinks further and further into the abyss.  Man, that sucks.  It’s stupid too.   When I’m wrong, I’m wrong.  That’s what a sell stop should be used for, in my opinion.  Why get greedy?  What you are saying is “I’m wrong, but I will ONLY get out at a price that works best for me!”  How greedy can you be?  You are splitting hairs.  Just get the heck out and move on!

Bottom line…don’t make these 7 deadly mistakes when it comes to sell stops!  I’ve been guilty of each and every one of them.  They are way to costly for you to make.  

I hope this helps your trading!

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The Greedy Goblin

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