Price Patterns In Setting Stops

When setting stop loss targets, it is important to understand the stock's normal trading pattern. There are numerous methods to accomplish this (use of bollinger bands, moving average crossovers, setting a formula based on the stock's beta, etc.). For those who don't know what a stop loss order is, see Investopedia's quick primer.

Last week a reader asked me if I knew any backup services that provided similar historical quotes (i.e. the percentage up and down a stock has posted in previous trading days) as nicely laid out by QuoteMedia's tables. Given the fact that some many free services have suddenly become unavailable, I commend that reader on always looking for backups in the tools they find helpful. In addition, if you know of another useful source that provides exactly this kind of data in a very similar format, please let me know.

Although I didn't ask him the relevance of such historical price data, I can certainly offer a reasonable guess. When I review charts and stocks within my own watchlists, I am always cognizant of the stock's past performance. I do this not only to quickly get a feel for how the stock trades, but also knowing how the stock has performed in the rallies and dips helps me understand where I should set my exit points. That's also why I tend to trade stocks that have been on my watchlists for awhile, rather than just any stock that simply pops fresh on the radar.

For example, looking at the chart below which provides the historical quotes for Bolt Technology (BTJ), we can quickly see the trading range in raw percentage terms:

The largest day decline was -13% on 1/3/07 and the largest increase is today with a +11.8% gain. Knowing this kind of historical price information is helpful to develop an ideal on the "normal" trading pattern.

I'd also suggest that you take time to also look to how the stock performed when the market was up and when it was down. Do you see any patterns there? If it is feasible, you also want to add another layer of research. Does the stock trade up with its peer group or does it fail to rally? Good stocks go up irrelevant to both while stocks on shaky ground tend to do the exact opposite. Does the stock go up on higher volume and get sold on lower volume and vice versa? All of these factors provide clues that will help you gain insight to your trades in a helpful way and set stops more effectively.

This process will also help serve to offer perspective on the risk versus reward of any trade you evaluate. Chances are good that the guy on the other side of the trade is armed with this information and will use it to their advantage. I know I do.