Part 2. Managing Your Money Using Stop-Loss

Okay, on to the advantages of futures traders employing protective buy and sell stops. As I said above, the major advantage of using protective stops is that--before you initiate the trade--you have a pretty good idea of where you will be getting out of the trade if it's a loser. If your trade becomes a winner and profits begin to accrue, you may want to employ "trailing stops," whereby you adjust your protective stop to help you lock in a profit should the market turn against your position.
On specifically where to place your protective stop upon entering a trading position, one of the most popular and effective methods is to find a support or resistance area that is within your loss parameter for that particular trade. Here's an example: A trader decides to go long corn futures and he does not want to lose more than $250 per contract if the trade turns out to be a loser. He should try to find a technical support level that's around 5 cents below the present market price, and then place his sell stop just below that support level.
I generally use the above formula when I place my protective stops. However, I know that the local floor traders also know where it would be most logical for most traders to place their protective stops. So, I will "tweak" my stop placement a bit to reflect this. For example, if I decide to go long corn and there is a solid support level that is within my loss-tolerance parameter, I will set my protective sell stop maybe a couple cents below that support level. My thinking would be that most other traders would set their protective stops about a penny below that solid support, and if floor traders were going to gun for stops, then they may not be able to hit mine if it's a couple cents below the solid support level. The disadvantage to this theory is that your stop may be hit anyway, if there were a bunch of stop triggered above my own stop and pushed prices lower. Also, my losing trade would be about $100 or $150 steeper per contract than if I had not tweaked my stop.
Only rarely will I call my broker and change the position of a protective stop in a trade in which I'm "under water"--meaning it's a losing trade at the time. That would defeat the purpose of making your decision on how much of a loss you'll absorb BEFORE you make the trade and are in the heat of battle during a trade. Conversely, on winning trades that I have going, I may call my broker every day and tighten a protective stop, if the market is moving rapidly.