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Figuring out the proper stop loss when day trading, whether experienced or novice, is always a tricky subject. One thing is for sure, if you don't use a stop loss and try to become a trader, there is almost a 100% chance you will lose a significant amount of money, if not all of it. Even using stops, if they are inapropriate, will result in net losses no matter how good the stock pick is. In addition, adding positions before market moving news events occurs can assure increased volatility and increased odds of stopping out.

The main thing to keep in mind is CURRENT MARKET CONDITIONS - I cannot stress this enough. Not what the Dow Jones Average is doing, it is what many stocks are doing overall and how they are trading. What is the volatility level - are they slow and steady or whipping up and down on the slightest market move? This makes a huge difference is not only your stop, but the risk level involved. Most people assess risk by the amount one can lose when day trading or swing trading. What most people fail to think about is the actual odds of that loss happening.

While there is no easy formula to figure out the odds, if you watch the pattern of behavior of how similar stocks are trading, you can get a pretty good idea. If conditions are calm, you might be able to use a smaller stop - a 30c stop has a 30% chance of getting hit for example. When more volitile conditions are present, using a smaller stop is a really bad idea because of the significantly higher odds that even a smaller than normal oscillation in price will hit your stop.

The way you figure the odds in a stop happening when day trading is somewhat straightforward. Look at the average range over the last 20 minutes or so, the high to the low area of the bars. Do not pick a very calm period of time, as this calmness tends to lead to increased and unpredictable volatility. If current times are super calm, go back on the chart to a more volitile period for the day (or another day) and then figure the range. It does not need to be an exact amount, we are just looking for an approximation. Once you have measured this range, this becomes your maximum risk.

What we want to do is to lower this max amount to a lesser level. This can be done 2 ways. The first way is to watch the pattern of trading behavior on the chart of the day traded stock - when it reaches a prior high level, does it push thru and run some, or does it bearly touch, then retrace (sell) down? If it starts to push the last few times it reached a high turning point, then it is probably ok to buy the stock on strength. If it tries to sell, or looks like a fade back - wait for it to push and then put your order in at 1/4 of the range computed, but lower than the high its at currently. So if the price range figured was 1.00, and the current price is at around 40 now, you would look to place your order at 39.75 to put on a long. You will most likely miss some trades doing it this way, but have to ignore the urge to chase the prices. If the pattern is on a lot of names (by eyeballing) you have to be especially careful.

A second way to remove some of the risk is to split your entry order into 2 different parts. So if your trade size you want is 500 shares, just buy 200 shares now. Wait until it pushes a decent amount up (meaning it has pushed enought that it has moved past the fade the breakout move area), then look to add the other 300 on a 5 or 10c dip. Move your stop price up higher .45 now (assuming you had a 1.00 stop to start) on all of it. The other choice if the price tends to fade after pushing higher is to buy 200 shares now and then place the balance of your order .25 above your stop (assuming it is 1.00). The maximum stop loss level should remain the same on all the accumulated shares. The difference here is if market conditions get poor for going long when day trading for a period of time, you are going to lose a lot more averaging when its selling because you will get filled on the add, then stopout 2 minutes later on all of it.

The easiest way around this situation is to lower your share size - when upredictability sets in, trade only 1/2 your normal size. The name of the game is preservation of capital first and foremost (hence the stops), but second its to avoid easy loss situations. While is is very difficult to actually tell that trading conditions are improving without actually trading, it is a very good idea to trade with less shares until you visibly see conditions look better over time.

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