Tight Vs Logical STOPS

new_trader · Dec 8, 2006

I often read articles that mention the use of tight stops. Only one article I have read used the the term 'Logical' STOP. A logical stop makes sense to me whereas a tight stop is arbitrary. How would you define a 'tight' stop.

wasp · Dec 8, 2006

A 'tight' stop and a 'logical' stop IMO are one and the same if you have done your homework. A logical stop to me is the tightest stop feasibly possible without ruining your chances of overall success.

c6ackp · Dec 8, 2006

new_trader said:
I often read articles that mention the use of tight stops. Only one article I have read used the the term 'Logical' STOP. A logical stop makes sense to me whereas a tight stop is arbitrary. How would you define a 'tight' stop.

IMHO proper stops can only be logical - if you don't place your stop beyond local support/resistance or some significant feature, as defined by your system, then it will be hit.

A logical stop becomes a logical+tight stop as a result of a killer entry. From a daytrading perspective everything hinges on a killer entry. A killer entry allows for a logical+tight stop and provides the risk/reward ratio required to make your system profitable.

c6

Splitlink · Dec 8, 2006

new_trader said:
I often read articles that mention the use of tight stops. Only one article I have read used the the term 'Logical' STOP. A logical stop makes sense to me whereas a tight stop is arbitrary. How would you define a 'tight' stop.

Wasp is right. I calculate the amount that I want to risk then work out where the logical stop will be. The price, then, should come towards that level. However, if it doesn't want to and keeps moving away I see two options 1) Put a numerical stop on or 2) Don't enter the trade. There is no harm in a numerical stop in a trending market. At least, you know how much you are going to lose. A tight stop is always better than not getting out until the logical one is reached. Sometimes, I just know that it is no good staying with the trade and I cut after a few points.

Split

jiggly · Dec 8, 2006

define your logical stop then buy enough of your chosen instrument to not exceed your risk criteria for that trade.

stops should always be placed logically, an arbituary value (tight stop) can also be logical in instances where it would otherwise be placed logically. A killer entry has already been mentioned, this is an example of such.

darkwanderer · Dec 8, 2006

A stop is an individuals perception of being wrong within the market, an executed stop is the market confirming the individual's perception of being wrong for that particular trade. A tight stop can be logical and a logical stop can be tight. Is there an optimum stop position or is it down to experience and how comfortable the individual feels about thier own trading ability. A tight stop is a stop within a persons own individual parameters. Why would they do this?

damianoakley · Dec 9, 2006

new_trader said:
I often read articles that mention the use of tight stops. Only one article I have read used the the term 'Logical' STOP. A logical stop makes sense to me whereas a tight stop is arbitrary. How would you define a 'tight' stop.

Like a few people have already said, a tight stop and a logical stop can be one and the same.

Your stop is where the market confirms that you are wrong on a trade. As for "defining a tight stop", this depends on what timescale you are looking at.

If you're trading a 5 minute forex chart, then your tight stop could be 10 pips, but if you're trading a daily chart then your tight stop could be 80 pips. Despite there being a 70 pip difference between these stops, both stops are tight stops relative to the chart you are looking at.

Thanks

Damian

Windowsill · Dec 9, 2006

I can work out where my stops can be placed and value i get . For me an 80pt stop gives best win lose ratio. However half the stop and double the investment gives a better return. This trend continues down to a 5pt stop !!!....But !!!.... could you stomach 10per cent win rate? A mechanical approach to start with (using spreadsheets or whatever) can soon give you the answers. My opinion now, is that if you're in a trade and it goes the wrong way just get out & wait to see what the truth is.... tight stops have the edge! The truth is out there :cheesy: .

darkwanderer · Dec 9, 2006

Tight stops are born of precise plans. Tight stops in the wrong hands are futile.

Trader333 · Dec 9, 2006

In my view there appears to be a great deal of misunderstanding concerning the placement of stops. The approach I take is quite simple in that I will place a stop relative to the volatility of the instrument in the time frame that I am trading and that is it. Position sizing relative to volatility is also crucial and if not practiced correctly significantly increases the risk of ruin. Placing arbitrary stops based on support / resistance levels or placing stops at fixed distances without consideration of position size and volatility just doesn't make sense to me. However, I accept that it appears to work for some but in my view this would then rely on a greater ability to "predict" market direction which is something I do not attempt to do.

Paul

Windowsill · Dec 9, 2006

Predicting the market correctly is everything. Logically if always correct, you would not need a stop. Having a stop would actually be of detriment.
On my models I have tried playing with volatility, and not being concerned with market direction. However I optimise the long/short open and close, a 50% hit rate in a trade correctly predicting the direction seems to work better, as you don't lose points up to the opening value whilst the market makes up its mind. Perhaps i'm missing something here.

charliechan · Dec 9, 2006

havent we done this one before?

Splitlink · Dec 9, 2006

darkwanderer said:
Tight stops are born of precise plans. Tight stops in the wrong hands are futile.

That depends on your ratio of winners to losers, surely? If you have a good porcentage of winners then, it seems to me, that the sooner one is out of the bad trades, the better. Of course, there is always the problem that a winning trade could , if the stop is too tight, be closed prematurely but then, we are getting into the area where hope lives eternally in a loser's breast.

Split

darkwanderer · Dec 9, 2006

Should a winning trade always be in positive territory, right from the moment of execution? Can a precise and accurate plan, that starts with the microcosm, eliminate the possibilty of the trade ever entering negative territory?

Splitlink · Dec 9, 2006

darkwanderer said:
Should a winning trade always be in positive territory, right from the moment of execution?

It's desirable but not always possible (in my case, at least

) Nevertheless, I am intolerant of positions that slip back too much because it means that the winners have to work harder. The stop question is a problem for most of us, no one knows how much the MMs will spike up or down, so there can be no firm rules.

Split

darkwanderer · Dec 9, 2006

Why would any trade ever go into negative territory?

Splitlink · Dec 9, 2006

darkwanderer said:
Why would any trade ever go into negative territory?

I don't think that there is a trader alive that does not expect some of his trades to lose money. How much, is what this all about. Price levels are unpredictable, no matter what the experts may say. A trade can go negative for reasons outside the trader's control. Bad economic news, another important company, perhaps, in the same sector
can go bust. All this makes forecasting dangerous.

Split

darkwanderer · Dec 9, 2006

Are you a gambler, Splitlink?

Splitlink · Dec 9, 2006

darkwanderer said:
Are you a gambler, Splitlink?

Do I seem like one, to you? I would be dishonest if I said that I was not a gambler, because I believe that all traders are, some more than others.

I take calculated risks with a small amount of my capital. Those risks are based on the number of times my my trades have been winners against losers. I had an unsuccessful period this autumn when I attempted index trading, after having swing traded shares for years. I may go back to it, again, if I can figure out my mistakes but, at present, I am doing what I know.

Split

darkwanderer · Dec 9, 2006

I'm going to give you some advice, Split. Never trade without a plan. Not being able to identify mistakes points to a person commiting the cardinal sin of trading without a plan. Get a plan, write it down, refine it and stick to it. Best of luck with the indexes.

Tight Vs Logical STOPS

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