Yesterday, the post of DNKN was shown to illustrate a high probability swing trade. One decision that will not be drilled down on here, although it will be mentioned quite often, is to have stops in place. After all not every trade will be a winner. But the stop level, and the potential loss for each person, will differ. So it is up to you to determine what your pain threshold is.
Usually you would want a good risk/reward ratio...say for example 2:1. So if a trade is expected to make 10% on the upside, then your downside stop should be approximately 5% below entry. That could be one way to stop your losses from building up.
Another way would be to use inflection points as stop levels. One problem with this method is that there will likely be many other people at those same levels and those stops can often be elected by savvy traders who can move size or influence prices. Inflection points would be levels of a recent high/low or a nearby moving average.
The area I am looking at for a stop in DNKN is the 50day moving average below $30.
Let me know if you have any questions or comments.
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