The anticipated average holding period has a very big impact on how tight your stops are going to be. For example, the "sweet spot" for the 2.3% rule is about 10 to 15 market days. The short end of the "swing-trader" spectrum is about 3 days or less (a large number of traders focus on holding periods of up to about one week) and the long end of the spectrum is 8 to perhaps 10 weeks. The remaining swing traders focus on the time frames in between. At the very short end, the 2.3% rule allows too much of a decline relative to the expected gain. However, it works well when you are trying to lock in a two-week move involving a 4% to 10% gain. If the stock is not too "wild," it will also work beautifully for moves of a month or more to lock in gains of 10% to 20% or even more. However, you may have to loosen the stop a little for more volatile stocks and for regular holding periods of more than 15 days. For longer-term investing, for example, a stop that is up to 6% below the highest low reached by the stock since it was purchased can be very effective. A stop that one stockdisciplines.com trader (MT) experimented with and found to be very useful for intermediate-term trading is one that is set 4% below the highest low. In use, it was infrequently triggered by a whipsaw and it did not give up much of the gain of the bigger moves. However, it would also give up 4% or more of the smaller 8% moves. That is why some traders focus on stops of 3% or less below the highest low. The tradeoff was the greater frequency with which a person is needlessly stopped out of a rising stock. It would be best if you worked out a personal stop-loss system, one with which you can be comfortable.

If you want a reference point other than the highest low, the following may be of help. A test of all the stocks in The Valuator showed that the average low was 1.7466% below the average high and .882% below the average close. This information can be used to place the stop relative to the highest high or highest close of the stock since its purchase. Thus, if the stock spikes up, the stop will lock in more of the gain. This works best when the stock makes a series of new highs, each significantly higher than the previous one. However, a 1-day spike may cause you to be stopped out the following day if the stock quickly returns to more "normal" levels. Walk away from stocks that often spike down. The specialist may simply like to "gun" the stock in order to take out the stop-loss orders waiting at the lower prices. That is, the specialist temporarily drops the stock price to trigger the sell orders associated with the stops so he can buy those shares at the lower price and sell almost immediately afterwards at a slightly higher price. When considering the purchase of a stock that often spikes down, the trader should try to place the stop just outside the specialist's spiking comfort zone. If such a placement requires the assumption of too much risk, find another stock. I prefer to concentrate on stocks that rarely spike. Look at charts and notice the length and frequency of downward spikes. Try to determine the percentage drop these spikes represent.

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