Jump to content


Learning about Stops

  • Please log in to reply
39 replies to this topic

#31 IndexTrader



  • TT Patron+
  • 7,694 posts

Posted 27 February 2004 - 12:02 AM

First, I primarily use a hard stop. I typically like to set a wide stop. I purposely do not set it in connection with a "technical point". My stop is more like a "fail-safe" type of stop....a point beyond which I will not lose any more money. But my big improvement in taking a loss came when I finally realized that I did not have to wait to be stopped out. Here's what I mean: when I make a trade I have a reason I made the trade. I have certain expectations for the trade based on the reason I made it, and based on the type of trade it is. So my revelation was that when price action starts to happen that is not consistent with my expectations, is not dovetailing with my initial reason, then I simply get out. I don't wait for my stop to get triggered. For instance, let's say I bought on a retracement back to support. My expectation might be that it holds support, that it rebuilds somewhat, then it starts back up. I set a stop that is a fail safe, but not at an observable technical point. Let's suppose that it bounces from support, comes back down, bouces again. Perhaps these bounces appear weaker each time they take place. The expected move up does not commence...the choppy action seems to take over. In a case like this I might simply close the position because it is not doing as I expected. I don't have to wait for my stop to be triggered. I purposely don't set a stop around an observable technical point. Whether this is right for you I cannot say...but I will tell you that in the markets I trade (index futures and stocks) technical points are run all the time to hit the stops. I'd rather let them run that point, observe what happens, then decide what I should do. If it was just a stop running exercise it will move the opposite direction quickly enough. Admittedly, sometimes this costs me some money, but never more than my "fail-safe". And most of the time my fail-safe is not triggered. One other thing: if I decide to close out because of the technical action, and later the index/stock starts to perform the way I originally thought...I'll get back in again, with a new stop, new expectations. Finally, I set my stops in connection with the volatility of the market. I want it wide enought to not be stopped out arbitrarily. IndexTrader IndexTrader

#32 sagitarius_d



  • Traders-Talk User
  • 511 posts

Posted 01 March 2004 - 10:33 PM

Here is something i found on money management..I am still "digesting" the concepts of this article..

#33 danzman



  • Traders-Talk ~
  • 908 posts

Posted 04 March 2004 - 06:41 AM

Since the market will do the unexpected, I like to use a hard stop to get me out (the hard stop is at a level that tells me my reason for buying was wrong). That initial stop is fairly wide, but my reward/risk ratio must be at least 1.618 (no coincidence fibo fans). Even a 50% win/loss ratio is nicely profitable with the winners that much bigger than the losers (Kelly value of .2, so 5 or more positions are traded). It seems like so many traders are more focused on winning all the time. Having your winners a lot bigger than losers is much more important...to me anyway. My batting average was .275 in my baseball days, so batting .500 ain't so bad ;) If the stock doesn't do as expected from point A to point B, I sell into rebounds (A 0.618 retrace is very common). This effectively lets the winners run, although sometimes a winner will turn into a loser :angry: . It's the price I pay though. D
I don't make predictions, I just react.

#34 ZGTrader



  • Traders-Talk User
  • 33 posts

Posted 12 March 2004 - 08:12 PM

The first rule on stops is simple. Never risk more then 2% of you account equity on any given trade. I am amazed that this has not been mentioned in any of the previous posts. Read Market Wizards by Schwager. This is what the big boys use. Where does one place their stop? What I use is a volatility stop calculated by the Average True Range (ATR). Stockcharts.com has this in their drop down list of indicators. Let’s say for example my account equity is $25,000. I think that XYZ which is trading at $15 is going to go higher. I look up the 14 period ATR for XYZ and see that it is 0.53. I use the following formula: Stop = E-(2*ATR) E = Entry Price 2 = I am risking 2 ATRs on this trade. This can be 3 or 4 or what ever spins you fan. ATR = Average True Range So in this example the formula is 15-(2*0.53) = $13.94 If I buy XYZ @ $15, then I am going to stop out at $13.94 The final part of this “system” is to risk 2% of my account equity on a trade. This is pretty simple. I first calculate 2% of my equity. In this case it is $500. Next I calculate the difference between my entry price and my stop, which is $1.06. Finally I divide the $500 by $1.06 and get 472 shares. Done! One question is what do I do with the rest of the money in my account? Well go and find another stock and run the same process on it. But let’s say that this time your XYZ stock is now trading at $23. I look at my account equity and see that it is now at $28,768.00. I use this new account equity number to make my next calculation for my next trade. My account has grown, so has my 2% risk! I run the numbers in my spread sheet and make the trade and set the stop. I have found that 5 positions does use some of my margin but it’s not too bad. This also works on the short side but you can figure that out. Homework for the weekend! The beauty of this system is that it will always adjusts your risk exposure to the market. Not to mention it is simple and elegant. Money management does not have to be “deep” or complicated. The simpler the better. K.I.S.S.! The hard part is figuring out what to buy and what to sell. Not to mention where to place those stops to protect your fat profits while the trade is on. Set this up in a spread sheet and the hard part is punching in the numbers! Dave

#35 Net



  • Traders-Talk User
  • 527 posts

Posted 25 March 2004 - 12:35 PM

Fibonacci confluence areas can provide rewarding entries to trades with tight stop losses. In the SMH chart example, the market has been selling off and is now correcting the sell off with a bounce off the recent lows.

http://www.ttrader.c.....he NET&id=976

The following link is the same chart posted with accompanying text deleted for higher resolution:

http://www.ttrader.c.....he NET&id=976

The chart identifies 3 sets of retracement lines. When the retracement lines are in agreement, they reinforce each other. The ideal entry is to place the order as close to the resistance area as possible, then hide the stop loss on the other side of the resistance area. The greatest reward vs. risk trade is a short trade entry at $40.15 to $40.20, with a stop at $40.50, identified by the red rectangular box. The resistance area must be penetrated for the stop to get triggered. A running of the short stops would likely exhaust prior to breaching the confluence area.

There is another weaker confluence area identified by the green box. A trade can be taken at this area, since it's not known if prices will test the red area. In this event, the stop is wider, because if prices clear the green confluence area, stiffer resistance is just above, and the stop should still be hidden on the far side of the upper confluence area.

The long entry is at the stop out level, or if a long was taken at the lows, stops should be tightened or the trade closed while testing the resistance area. A long trade below the resistance area should be considered counter-trend until proven otherwise (clearing the confluence of resistance). If prices clear $40.50, the confluence now becomes support, and a shallow stop would be below the red area at $40.15, followed by a deeper stop below the green box at $39.50.

#36 darnelds



  • Traders-Talk User
  • 464 posts

Posted 30 March 2004 - 05:10 PM

Does an automated platform such as Tradestation or IB provide the ability to set a stock stop loss in the software (so it's not visible to the specialists or market makers)?

#37 tomtomboombang



  • Traders-Talk User
  • 1 posts

Posted 06 April 2004 - 11:47 PM

Someone should say something simple like, "Go someplace that has pivot points that WORK, and stick with them for the following day" For Tomorrow: TASR PivotPoints: S5=48.73 S4=55.19 S3=65.63 S2=72.09 S1=82.53 P=88.99 R1=99.43 R2=105.89 R3=116.33 R4=122.79 R5=133.23, If you have never tested Pivots or worked with their abbreviations, then: S=Support, R=Resistance and P is the projected open tomorrow. Next you gather some basic EOD Moving Averages: VWAP=86.28 200DaySMA=25.81 50DaySMA=56.10 20DaySMA=65.36 50DayEMA=58.63 And find some site that gives you the daily 50% Retracement Value: 50%Retrace=87.00 THEN you cook them together: TASR Support/Resistance: (200DaySMA=25.81) S5=48.73 S4=55.19 (50DaySMA=56.10) (50DayEMA=58.63) (20DaySMA=65.36) S3=65.63 S2=72.09 S1=82.53 (VWAP=86.28) (50%Retrace=87.00) P=88.99 R1=99.43 R2=105.89 R3=116.33 R4=122.79 R5=133.23 At this point you have your Swing numbers for a stock you have already bought or shorted. If you are an EOD person who works all day on the East coast, then you should know that P=NEAR the next day's Open... about 50% of the time. Through daily observation, you should know that on boring days it will bounce between S1 and R1, or your source for Pivots is not good enough. And you should also know, when active Traders get involved then your stock will usually move in one of the following patterns: P to S1 to R2, or P to R1 to S2. You can set a long stop between R3 and R2; and you will probably still be in your stock tomorrow night. Or if you are margined short, you can set your stop above R1 and pray before you go to bed. For you lucky West coast people who get up before 5AM and check the Pre-market, you are not done yet!!!!!!!!! Early birds need to add more numbers to their S/R, plus know what to look for when you check your stock price. This is exactly why I chose TASR as an example,,, because it exhibits many of the alarms I look for. Check news for the simple things: i.e. Earnings=04/20/2004, up-grades down grades etc etc Get the previous days HOD and LOD: High=95.45 Low=78.55 Check it for distinguishable features: wr7 After Hours close: 90.70 down 1.55 And any increased Confluence on the charts: none today And cook it too: TASR Support/Resistance: (200DaySMA=25.81) S5=48.73 S4=55.19 (50DaySMA=56.10) (50DayEMA=58.63) (20DaySMA=65.36) S3=65.63 S2=72.09 (wr7 Low=78.55) S1=82.53 (VWAP=86.28) (50%Retrace=87.00) P=88.99 (AH=90.70) (wr7 High=95.45) R1=99.43 R2=105.89 R3=116.33 R4=122.79 R5=133.23 At this point you are ready to see if any of your Pivots are obeying the pre-market moves. I always hold onto the numbers I used the day before in case we get a huge distortion like TASR did today. S/R is normally tighter: i.e. a Prev Day: S5=76.46 S4=78.51 S3=79.99 S2=82.04 S1=83.52 P=85.57 R1=87.05 R2=89.10 R3=90.58 R4=92.63 R5=94.11 On very rare occasions the previous day's will work twice (something to remember when your source fails). If you are still around for the Open (lucky dawg) then the opening price inserts into your R/S, and the closest R or S becomes the Pivot. R1 becomes the letter-number above and, S1 is the letter-number below. Your Moving Averages rarely offer Support or Resistance but are often used to visually spot Joe Sixpack's stop losses and will prepare you for the conclusion the once/day guys are going to assemble. The patterns mentioned above will apply to the newly reset numbers so, unless there is strong news, you can set your stops and go to work. Previous day HOD and LOD are regularly used as entry points by Daytraders during the day, but the reason they are important today is because TASR had a wr7 day. Unless a trade has gone amazingly in favor of a Daytrader, they will not hold over night. In today's action, every trader in the world might have held some TASR overnight, hoping for a follow-through tomorrow; hence the Widest Range in 7 days (wr7). The day after a wr7 I look for two things: 1. the overnight high and the overnight low on the appropriate Futures, and a gap up or down for TASR at the Stock Market's open. Even though you are looking at TASR, you want to watch the Futures on the appropriate Index because you have three chats to access: i.e. The ESM4, the $SPX Index, and SPY. Take note of the overnight Futures High and Low compared to the Opening price of the S&P. If the Futures opens at either the overnight high or the overnight low, or immediately goes to the high or the low, then there is an 80% chance that the open is the high or the low of the day. Either the Index will stay above the open without a violation or it will stay below the open. You should be able to tell within 10 minutes. Therefore the Open becomes your stop loss. On the wr7, we LOOK for a gap up or gap down and then buy or short it back into the Previous Day's HOD or LOD. That becomes our target and when the price passes our target we set our stop loss at that target. Hopefully the price will continue in your direction and close without coming back. (A scalp becomes a good trade.) BUT, most of the time you are going to get the scalp. On a normal day, the overnight position will lead to an equal hedge at the Open which turns to a scalp, and then the stock continues for a follow through. The aggressive Traders are checking the time&sales in case they want to reverse at the target-turned-scalp... a hat trick. Inversely, the reason you have watched the overnight Index Futures is to determine if the Index and you stock is going to gap and run. You should have already looked up the Beta and how much it has moved against the S&P: TASR Beta=3.65 chart up 186% against S&P (YTD). A conservative statement would say, "TASR is at least 265% more volatile in the direction with the S&P." So if your Index is going to gap and run; chances are your stock is going to gap and run too. Buy the open and set a 2% or a 6% stop loss, just in case one of the Brokers tries to get on CNBC and smash the stock in order to get one of their funds in or out. If you are trading every day, you should be wise to their disguise. You should also be wise enough to know that CNBC's retirement is heavy into bonds this year, and Maria is married to a Hedge Fund. Consider them the stock anti-rally network.

#38 fastmeerkat



  • Traders-Talk User
  • 1 posts

Posted 12 June 2004 - 12:21 PM

Simple, but effective stop loss strategy I find works for me.

I'll just post the link rather than polute the board with a heavy article:


#39 calmcookie



  • Traders-Talk User
  • 2,536 posts

Posted 07 February 2005 - 11:32 AM

You mentioned "back testing" your trading system. Can you give me any advice on how to do this? What software do you use ... if any? Or can you suggest what I can read to learn how to do this? Thanks! C.J.

there are 2 things...

1. find/develop a good trade system (back tested with up, down, and reversing trends) that you are comfortable with (either daytrade, short term, medium term or long term.)

2. use stops to manage losses or profits, when your trade system says to get in and to get out.

so I use stops for 2 reasons only... when I'm ready to enter a transaction and when I'm ready to exit a transaction, because I have to have a reliable enough trade system that will get me out on minimum losses and get me out on maximum profits, most of the time. so doing the 2 things above should help one to be a better and successful trader.


#40 darnelds



  • Traders-Talk User
  • 464 posts

Posted 27 July 2007 - 03:01 PM

Trailing stops at online broker Does anyone have any experience with trailing stops offered by Scottrade or other online brokers?