When a stock has been running up and up a solid, proper Risk Analysis must be used without exception before you buy into it. This must be done without consideration of what some celebrity guru says, and without bias or prejudice. If you love the company's products or services, that is NOT a good enough reason to buy the stock. The ONLY reason to invest or trade a stock is to make profits, either over several years OR a few weeks to a few days depending on your trading style.
Proper Risk Analysis involves the current entry price a trader or investor would pay versus the proper and correction stop loss UNDER the support level, that would provide sufficient support to sustain and hold the stock above that support even in a correction for long term or a retracement for short term. Where you place your stop loss to calculate your risk depends upon your hold time and goals for each stock you buy and every stock will be different.
The old style and outdated method for calculating risk was of course the 8% or 10% rule. This was created during a period when there were no stock charts available to view for retail long term investors and small mutual funds. Using a percentage made sense 40 years ago. It is not the right way to calculate risk in our modern market structure which is dominated by Dark Pools, High Frequency Traders, pro traders, etc.
The correct stop loss must be based on technical patterns regardless whether an investor or trader is a fundamentalist. Only the correct technical support provides proper and valid stop loss placement, and Risk Analysis which is the difference between the entry price and the stop loss. The number of points tells you how much risk you are taking.
Many day traders and swing traders assume that if they just keep a stop loss very tight to their entry price that means they are taking lower risk, however the opposite is true. The closer the stop loss to the current price action, the more likely a tail or small gap down will take the trader out of that trade, only to watch that stock climb while they are not in it. Most of the traders who say that stop losses do not work are either using the outdated percentage rules OR they do not have a good foundation of how to USE technical analysis, for evaluating where to properly place the stop loss based on market conditions, trading styles, and goals.
Risk Analysis depends upon the ability to accurately determine the current market conditions to know which support level is the strongest at that time, where the stop loss must be placed to allow the stock to move naturally in its normal pattern, and a good candlestick buy signal entry. Getting out of the mindset of chasing stocks because they move up, and believing that any stock that is running should be a good buy is hard. However if you do this your profitability will increase sharply.
