It is virtually a "law" of trading in the stock market that wherever you place your stop loss, it will occasionally be triggered by a stock just before it resumes its climb to higher levels. That is just something to be expected if you use any stop-loss. Unfortunately, not using a stop-loss is asking for trouble of a much greater magnitude, and the market loves to reward the foolish, lazy, or stupid, with the just recompense of their behavior. It makes no difference if you set the stop at 10% or at 3% from the low, high, or close. You can use stops that are volatility-based, use Fibonacci retracement ratios, Gann analysis, pivot points, percentage declines, or any other approach. No matter how sophisticated your mathematics is, you will often find you have sold for no good reason other than the occurrence of a temporary price spike that was just sufficient to trigger a stop loss -- your stop loss. Learn to live with it.

On the other hand, you can control risk and have some say about the probable frequency with which you will be ejected from a position because of such a spike. The further your stop is from recent price action, the less likely it is that it will be triggered. However, the further your stop is from the price action, the more risk (downside price excursion) you are going to have to tolerate. Not using a stop at all means you are willing to accept unlimited risk. Using a "tight" stop means you are willing to tolerate very little risk but you dramatically increase the chances that even a minor spike will eject you from the position. The tighter your stop, the more ejection-causing spikes will occur in any given time period. The only way to resolve this dilemma is to find the best tradeoff between an acceptable frequency of unnecessary ejections and an acceptable amount of loss that you incur because of that ejection. In other words, you must find the compromise that induces the least amount of pain (psychological or financial).

Magee and Edwards (Technical Analysis of Stock Trends) teach that a good stop based on closing prices is one that is placed 3% below a rising trendline. The stop is triggered only if the stock closes at or below the stop. However, if a trader intends to sell on the basis of intra-day price activity rather than on the basis of closing prices, they suggest that the stop be placed 6% below the rising trendline. Below the trendline or below the most recent minor dip is usually the best place for a stop. However, sometimes there is no trendline or obvious recent minor dip. That is when you must use a mathematical stop. Either a simple percentage based on the highest high, low, or close since you purchased, or a volatility-adjusted variable stop placed relative to the highest high, low, or close since you purchased will serve the purpose. Magee and Edwards, Weinstein, Schwager, Murphy, and many others use trendlines, dips, or moving averages as a reference for placing a stop. Rising trendlines follow the lows, dips are nothing more than significant recent lows, and moving averages generally follow a rising stock somewhat below its recent lows. Therefore, it also makes sense, in the absence of all of these, to use the recent highest low as a reference for placing stops. With no trendline or dip to use as a reference, you could simply place your trailing stop 3% or 6% (or some other distance) below a moving average that closely follows the trends of significance to you, or even below the highest low achieved by the stock since your purchase.

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