Technical Stops

• Technical stops are how professionals usually operate and are highly recommended
• The word 'technical' simply refers to the fact that these stop levels are based on chart levels
• Technical stop losses make sense because they force you to place them above or below price levels that have some sort of relevance
• An example of a technical stop is below a daily or weekly low, or a price level where the market has found some previous support or buying interest
• The advantage of using these kinds of stops is that your trading will start to be dictated by what the market is doing, rather than your gut feel and guesswork.

Example of Technical Stops - Recent Lows in Vodafone

• In this example there is a clear standout low (once the market starts rallying at the end of July)
• A sell stop loss order slightly below £1.12 would be a sensible place to position it
• But how far below this level? This is where experience plays an active role
• However if the share, index or product is not so volatile, as in this case, then a few pence is recommended. For this share we would use a stop level of £1.09

Monetary Stop Losses

• The simplest stop losses are monetary or percentage stops which give you instant knowledge of what your loss will be
• You buy £1 of the FTSE 100 at 4100 and decide to risk £25
• A simple calculation means that you would place your stop loss at 4075

The disadvantage to monetary stops is that they are placed at arbitrary levels which mean nothing as far as the market goes. It is far better to place your stops below or above meaningful levels, such as a recent low or below some support that you can see on the chart, as with technical stops discussed above.