It's a great question and good risk management techniques are necessary to maximize returns for your portfolio. There are several ways to do this. These ideas work for me but may not be suitable for someone with a different level of experience or risk exposure (especially #1).
1. Don't use stops or exits for your stock at all, just write covered calls (at-the-$ or just out-of-$) and keep rolling them over to a lower strike and/or month if the stock keeps dropping. Cover the option once most all premium is gone (assuming your not rolling over). All premium will be gone when either the price is close to zero or mostly intrinsic (in-the-$) value remains...time is on your side when you sell options so be patient.
2. Use stop losses on positions when a clear technical exit exists (i.e. recent low at a support level). I recommend a stop loss on 1/2 your total position or less with at least a $0.20 buffer below the recent low. If no clear technical exit exists, use a % consistent with the stocks volatility (don't use a 2% stop on a microcap-10% is more realistic).
3. Scale in and out. Each purchase should account for no more than 1/3 your total desired position size. When selling go 50% or less on each trade. Continue to buy on weakness (over days or months) until you have enough shares. Commissions are so low these days they don't usually add up unless you trade A LOT.
4. Use "short" ETFs like the QID and SDS to hedge your portfolio. This is especially effective if you want to have a core holding of small positions that might total less than 30% of your portfolio. Buy some QID or SDS in the right proportion and you can hold your favorite stocks through a steep market correction and still make $. All this assumes your entry and exit are correct and you have cash for hedges. Use technical analysis tools if you can.
5. Always have some cash on hand (at least 20% of portfolio) and only spend it after a sharp & quick correction...when you do get to 0% cash take profits quickly and use stops below recent lows to protect your a$$.
6. Pick mostly stocks with good fundamentals and earnings growth history. If you do want to speculate, only allocate a tiny portion of your portfolio (consistent with your risk tolerance...I prefer 3% or less) for all these risky positions.
7. Make sure your portfolio is balanced. Don't get concentrated in one sector or industry. It doesn't have to be "diversified" - just make sure it isn't fat in one area. Also allocate your assets across at least 5-10 stocks and keep at least 10-15% in bonds (SHY or TLT ETFs do the trick). Make sure you are getting your cash into a Money Market and not the brokerage firm's "Cash" account.
GL.
