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A trailing stop-loss is common. It’s where a percentage is set below the price of purchase, which then “trails” higher as prices move up. It’s important to note that the tighter your trailing stop-loss level – for example, 5 per cent – the more likely it is you’ll be stopped out. But while making it broader reduces fake signals, it exposes you to a potentially bigger hit.

Another variation on a price-related stop-loss is a moving average, where an average of the price is taken over a period. Investors are in the trade if the current price is above the average. Below the average, you are out. The longer the average – for example 200 days – the less likely a price will trigger an exit. Once again, though, you’re susceptible to larger price falls. Some will combine two moving averages – one slow and the other fast (for example, 13 days – and apply them the same way.

Pattern-related

You’re looking for a pattern in the chart. For example, if the price moves in a way where the highs and lows over several days/weeks seem in parallel to each other, this is known as a “channel”. If prices initially move within a range, but then subsequently as the days go by the ranges get tighter, this is a “triangle”. Even previous highs and lows (ie, the points where prices pivot and change direction) can create different patterns.

The idea here is that if price breaks to the downside of a pattern, the risk of continued declines is elevated and therefore it is time to enact your stop-loss. Incidentally the reverse is true – if a price breaks up out of a pattern, this can be viewed as a buy signal.

Indicator-related

Many mathematicians have built formulas to create specific indicators that help investors see what is happening with the price. MACD, RSI, Stochastic and Bollinger Bands are examples of such indicators. Analysts such as J Wells Wilder Jr and Gerald Appel developed indicators that help investors interpret a range of different actions – including identifying when a stock is overbought or oversold, when prices are trending and/or when momentum is starting to change.

Some indicators are based on price as the flow of money combined with the price action makes for a clearer picture of what’s going on. Investors should note, however, that while these indicators make for easy interpretation, rarely if ever are they used in isolation. Rather they are used in combination to confirm what is being observed in the price chart.

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Exposure-related

The style of indicator is based on the size of investment (or exposure) and can be used as a money management device to encourage an investor to take profits and avoid over-concentration. For example, where a stock becomes 15 per cent of the overall portfolio, reduce that exposure by one third – ie, to 10 per cent – to lock in some gains.

Another application of an exposure rule is in position sizing. The most common interpretation is the 2 per cent rule, where an investor can risk no more than 2 per cent of their available capital on any single trade – for example, $2000 for a $100,000 trading account. Working backwards the investor can measure a stop-loss based on the amount of stocks they hold and the amount of capital they are willing to leave on the table on each trade.

But they don’t suit all

In the case of an investor who maintains unwavering faith in the business, should a price retracement occur, then a top-up, not a sell-down, is in order.

While this is a topic that extends beyond simply buying and selling, the point is to highlight that having a stop-loss strategy can give you the confidence to jump into the market without fear of losing your capital.