Split the Stop: A Different Way to Place Your Stop Loss
For when all or nothing doesn’t work
A lot of people scale out of winning trades.
Maybe you do it? Peel some off, pay yourself, leave a runner, that kind of thing…
So why does hardly anyone scale out of losers?
For most traders, it’s a full stop or nothing.
And perhaps that’s not optimal…
SPLIT THE STOP
I’ve been thinking about this, and sometimes, sure, the trade has a clear exit point. An exact price level where the thesis is no longer valid.
“Buying this exhaustion flush candle here, stop below the low” Makes perfect sense…it’s no longer an exhaustion if that low gets taken out.
But what about on setups where the exit point isn’t quite as clear-cut?
Take a pullback buy…
Let’s assume you are in the right context, and you buy a pullback. You might be thinking about a few scenarios.
- Buy now, stop under the recent pullback low
- Buy now, wider stop to take into account a fakeout
- Wait for the low break and retake, then go long
Take SpaceX for example…(but it could be any market.)
Day 2 after the IPO, and you see price break the prior high, drive hard, and pullback. You want to get long…
If you did #1, the setup could look like this…
Long at $182, stop below the pullback low.
If you did #2, it could look like this.
Long at $182
50% of stop below pullback low
50% of stop even lower to accommodate a second low test
In other words, you want to lighten the risk if that low breaks, but still want to be long.
After all, you can always add it back on if you want…
Actual result:
Now of course, I picked this example to illustrate the point, but I thought it was a good one.
SpaceX was a bit wild and unknown, so you may well have wanted to participate in the intraday momentum but know it can be pretty whippy.
The point is that splitting the stop gives you a third option…
If “all in now and stop at a set point” doesn’t work.
And waiting for a fake and retest doesn’t seem right,
Then for some plays maybe the answer is just to trim the risk?
We don’t need to be all in or all out.
Trim a little, de-risk the situation… there’s nothing to say you have to hold everything until the stop point.
It’s not for every trade, of course, and you need to adjust position sizing to suit, but there might be a few setups in your playbook where this could be an option.