Yesterday, both GDX and HUI, the gold bugs index, closed above their 200 day moving averages, resulting in heavy buying (and selling) at the close. My computer shows over one million shares of GDX changed hands in the last minute of trading yesterday. Everyone who bought then, and didn't set a stop, is now down 3.5%.
What caused this market mayhem? Ben Bernanke spoke to Congress.
Whatever you are trading, you should enter a stop loss order to limit your risk when you are not watching. The stop loss order will sell your stock as soon as the price gets down to a price you have determined ahead of time. This takes the emotion out of your decisions to sell and helps you sleep at night.
Even if you use a full service broker (although I'm not sure why a trader would not use a discount broker) you need to make sure they physically set a stop loss order for you rather than just watching and hoping they can get to it.
So how do you determine your stop price? Trend line support, old highs, and old lows are all valid places to put your stop. Do not put the stop right at the line. Give it a little room so a minor violation of support will not send you out at the low. How much room will be determined by experience. Look back and see how much support was violated on other occasions, but still ended up holding.
Happy trading.
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