By Matt McCallJul 15, 2017
This is a good question and an important point to clarify: stop-losses and critical support levels are not the same thing. The critical support level is the area that a stock needs to hold on a closing basis in order to remain bullish in the short-term. That level could be price support, a trend line, a moving average, or another level of support altogether.
The reason I refer to them as critical support versus a stop-loss is due to the volatility in individual stocks. There are many instances when a stock breaks the critical support level intraday and rallies back to close above the support level. Or a stock may break support for a couple of days before rallying. If we only used stop-losses (orders you place with your broker that automatically trigger when a stock hits a specified price), it would result in us getting kicked out of a position during any intraday pullback and missing out on subsequent rebounds. By using a critical support level, I can analyze each chart on its own merits and determine whether a stock should be sold or held. In short, it gives us risk management as well as the flexibility to make the strongest trading decisions using all the information available instead of getting handcuffed by an automatic stop-loss.
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