Stop loss or % of capital?

[tireg]

Setting Stops mini-art.

He is right. [Target] entry, [Target] exit, stop, position size, risk, reward, exposure, ROI, velocity or ROI/time are all interrelated. Dr. Elder makes a very good explanation of this in his book, Come Into My Trading Room. Understanding the dynamics in which these operate is key imo.

Gosh I bet there's like 500 posts about this subject... but let's rehash shall we:
Since this is about the principle of stop, what is the point of having a stop? Obviously it is to reduce losses incase the market goes against you. Or to lock in profits if you have a gain. Point is, once it gets triggered, it will be your exit price ideally.

Seems to me like your problem is that your stop is getting triggered too soon, meaning it is within the usual market movement... if you want to compensate for this, you will have to set wider stops. This however will make you risk more money per trade, so if you do get stopped out, you will lose more money than you would have if you had a tighter stop. But you'll get stopped out less so it all works out in the end.

Now, there are a few theories on setting stops, a few of which I will state:
1. %tage based stop; this means you set your stop at x% below or above your entry price. Kind of arbitrary in a way b/c without looking at the chart, you don't know if its within normal trading range... but I've found that 7% is a good figure for position trading that often is away from market noise. O'Neil recommends no more than 8%, and certainly never more than 10%.

2. Point stop; this means you set your stop x points below your entry. This will vary with your time frame and risk tolerance. Most often used by shorter term traders, who often use 1-2 point stops.

3. Time stop; this is a sort of 'mental' stop, to be used in conjunction with one of the other 3. It is mental because it involves time... Basically, you give the trade a certain time frame to reach your price target or make a move toward it. If it does not react in that time frame, exit the trade. This prevents you from tying up your money in vehicles that aren't moving; ie velocity of the trade is near 0. Risk here, though, is that since it didn't hit the exit stop value and get automatically stopped out... it could make a move right after you exit.

4. Chart-formation based stop; most commonly used by longer-term traders, but many day traders use it as well. Basically involves setting your stop right below support levels or right above resistance levels... includes trendlines, formations, etc. If it hits the stop, the trend or formation has ended and the path of least resistance is moving. Very effective as it takes into account market noise and you can look at the normal range etc.

If there are any others please feel free to add.

 

[SOCRATES]

Hello, guys. Yes, i was drunk last night and i regret some things (which i have deleted), but not all.

Now, ENTRY, EXITS and STOPS? Who thinks that they are all separate issues, to be dealt with separately? To know one of the three little pigs, is to know them all. The three little pigs serve each other in a traders own mindset and the best know the equal value of them all and also know not to differentiate thier importance.

Knowing when to buy and when to sell or vicky versa, on any time frame, is the inherent problem for traders, (no s**t), you may say? Knowing your price action is the key to knowing the three little pigs.

Know your market, and the three little pigs will play together happily.......you may even make some money.

Yours,.....Enid Blighton.

RUDEBOY, Good Morning. May I expand a little on this ?

 

[SOCRATES]

RUDEBOY, I forgot to mention, not a lot....just a little...

 

[RUDEBOY]

Dr. Lecter, also makes good of human meat....

But i wouldn't go for his cullinary delights.

It's all a matter of personal...................'taste'....

The basics are there in an obvious manner, how you warp the facts is up to you.

 

[RUDEBOY]

Hello, Socs.

I hope your Saturday morning is a good one?

 

[SOCRATES]

The basics are there in an obvious manner, how you warp the facts is up to you.

I am very glad you mention this because it sets the tone for what I intended to add.

The problem for many traders is that they become impatient or curious and they now begin to jump from one timeframe to another, without giving themselves the opportunity to "tune".

The little bits that precede and follow this are the most difficult for them because of this natural propensity to hop around, from timeframe to timeframe.

Part of the difficulty is that this distracts them from being able to consider all the piggies at the same time.

I know of people who use up to 12 charts of the same instrument running in real time in different timeframes, only just because it is possible to do.

If you want to disorientate yourselves completly and get a good headache, this is the best way to go about it.

 

[RUDEBOY]

Time frames?

The worst trader in the world never knew his/her time frame!

Too much at stake?




Know your time frame.

For some it's a no win situation!

Stops! They only work when you are on the right side of the market. How do you get on the right side of the market?

Experience?

Tell me what to say!

Give yourself a chance and start small.

 

[SOCRATES]

Now here is another thing to consider:~

It would have to be grudgingly admitted by the majority, that they truly do not know themselves.

What I mean by this is that they don't really know themselves from the outside in, and from the inside out., I mean really really know themselves absolutely.

If they intimately did know themselves, and had got to know themselves totally, then they would not take positions which were WRONG, they would take positions that were RIGHT, as no one in his or her right mind takes a position on purpose to LOSE MONEY.

Yet, as the great majority persist in taking actions that are not successful, it must be that they do not know themselves well enough to be able to ENTRUST THEMSELVES to act according to their own judgement, unless I am thoroughly mistaken and people enjoy self inflicting themselves with miseries.

 

[SOCRATES]

Apropo's, now look at the bewildered expression the chap in the advert below is displaying.....which is very relevant to the whole problem of self knowledge, which is the ultimate KEY.

I say this, because if everyone had complete and perfect self knowledge then as a direct result of such a happy condition, no one would persist in trying to make something that is "WRONG", "RIGHT", as is the case for example with traders in a losing position unwilling or unable to close it and take a small loss early instead of letting it run and allowing the situation to worsen.

This malfunction applies to A LOT OF SCENARIOS in real life, but let us only for the moment, focus just on trading, which is an ideal scenario in which to study these anomalies. This is because in trading there are no remedies or excuses of any sort, and no possiblilty of hiding from or shirking brutal realities.

It therefore follows as well that this must be the reason why people are apt to see in a given situation what they want to see, and not recessarily WHAT IS.

It therefore follows that this must also be the reason why people are apt to apply HOPE to a situation in which hope does not figure at all, but instead a cruel reality that inexorably serves to contradict the validity of having such a viewpoint.

It also follows that this must also be the reason why people end up doing the OPPOSITE of what it is they ought to be doing.

It also follows that this must also be the reason why people are apt, with hindsight, be inclined to WONDER why they did what they did.

It also follows that this must be the reason why people find themselves COMPELLED to do things they do, only later to realise the consequence of impulsive blunders.

It now leads us to consider that the majority popular opinion has to be WRONG, even if it is collectively defended being the consequence of these self inflicted inabilities.

This is why the minority is able to DISREGARD the majority popular opinion, not as an act of contrarianism, but because it is nearly always WRONG.

More of this foul tasting medicine later....

 

[charliechan]

Apropo's, now look at the bewildered expression the chap in the advert below is displaying.....which is very relevant to the whole problem of self knowledge, which is the ultimate KEY.

I say this, because if everyone had complete and perfect self knowledge then as a direct result of such a happy condition, no one would persist in trying to make something that is "WRONG", "RIGHT", as is the case for example with traders in a losing position unwilling or unable to close it and take a small loss early instead of letting it run and allowing the situation to worsen.

This malfunction applies to A LOT OF SCENARIOS in real life, but let us only for the moment, focus just on trading, which is an ideal scenario in which to study these anomalies. This is because in trading there are no remedies or excuses of any sort, and no possiblilty of hiding from or shirking brutal realities.

It therefore follows as well that this must be the reason why people are apt to see in a given situation what they want to see, and not recessarily WHAT IS.

It therefore follows that this must also be the reason why people are apt to apply HOPE to a situation in which hope does not figure at all, but instead a cruel reality that inexorably serves to contradict the validity of having such a viewpoint.

It also follows that this must also be the reason why people end up doing the OPPOSITE of what it is they ought to be doing.

It also follows that this must also be the reason why people are apt, with hindsight, be inclined to WONDER why they did what they did.

It also follows that this must be the reason why people find themselves COMPELLED to do things they do, only later to realise the consequence of impulsive blunders.

It now leads us to consider that the majority popular opinion has to be WRONG, even if it is collectively defended being the consequence of these self inflicted inabilities.

This is why the minority is able to DISREGARD the majority popular opinion, not as an act of contrarianism, but because it is nearly always WRONG.

More of this foul tasting medicine later....

good observations.

tastes foul to some, but after the whole bottle, you realise everything is quite sweet! (not you rudeboy - sounds like you have had a bottle too many already )

ps - how did you get those 2 green blobs next to your doo-dahs (under your name)? I want two too. in fact, i would like 3 or may be 4.

 

[SOCRATES]

This brings me on to the subject of contrarians.

It would be best if they called themselves contradictors instead of contrarians.

Let's see what contrarians believe themselves to be and then we shall examine what they are in reality.

Contrarians view themselves as taking the opposite view.

What in effect they are doing is taking a contradictory posture.

The correct way to go about it is to take the correct posture always or nearly always.

Then if the majority popular opinion is the opposite this is contrarianism by default, not by design.

To be contrarian by design is often a disaster.

This is because frequently the opposite view to the correct one is taken for the sake of contradicting.

In my posts above you see how it is that people are apt to misdirect themselves as a consequence of not looking deeply enough into themselves.

If they were able to look deeply enough into themselves they would not behave the way they do.

They would take actions because they are the correct ones to take and for no other reason.

This self criticism and introspection is difficult for most people and impossible for those with large egos.

This problem of large egos occurs as a result of lack of self knowledge. Since self knowledge is the key, then the large egos are beset by a variety of padlocks and locks for which they have an assortment of keys, but these keys do not open the locks they want, and in consequence the bunches of keys they hold are useless.

In this arena there is no willing locksmith to be called upon for help, therefore each of us is required to cut his own key to make it fit correctly.

Each problem is like a lock, with its attendant key.

When you start on this adventure of entering the world of trading, you cannot use the same key to open all the locks, you have to have a key for each. Much later when you evolve and finally when you attain mastery you are afforded the luxury of owning a master key that is able to open all the locks you need to open.

Before you can do this, you have to do a lot of work.

The great bulk of the work you have to do is on yourselves in order for you to be able to remove the filters and attain perfect self knowledge.

Only when you attain perfect self knowledge and all the faculties attached to it, like proper conduct, responsiblility, cognizance and response can you start to even think of being proficient in the markets.

There will be another dose of this bitter but necessary medicine later...

 

[RUDEBOY]

I've read so much, Socs,........the rest seems contradictorary?

How far will i go?

I'll get banned............that's where my truth gets me!

Am i pollite?

Trading?

Where does it get you?

 

[SOCRATES]

Some wag is going to accuse me of having an ego, sooner or later. This is invariably the tack taken by individuals when they are faced with the brutal facts as laid out here for all to read and self reflect.

What happens is that as a consequence of unwillingness or inability to self reflect deeply in order to get to the root of the problem, all sorts of excuses are found not to do it. This is a natural human propensity.

If you really want to succeed at trading and not rely on formulas, systems, indicators, Catherine Wheels, and myths, then you have to do the work, on yourselves first and then everything else after.

This inability or unwillingness to do the real work of trading is what leads people to persistently ask the same questions again and again, and to even disguise the questions that have already been generously answered in the past on these boards, by obliquely asking a different set of questions, but, in reality they are the same questions of a family of the same questions.

More of this unpleasant but ultimately necessary medicine later...

 

[jimmy1jag]

This is interesting stuff Socrates... I'm not going to interrupt though... I will say that it's very difficult indeed!! You just keep on coming across new rotten bits! ;-)

 

[RUDEBOY]

Anybody, tell me what's right......

Now, tell me what is wrong?

Thanks!

 

[fxmarkets]

Am i personally attacking this guy with verb?

Certainly not!

Does he irritate me......?

Yeh, he does.

Do i have an inferiority complex?

No!

But,.......let's be reasonable here.

You wanted a chat, well, you've got it?

hi rudie, one thing I noticed after posting on the self help crash course referring to learn how the feeders feed and catch the prey, well after that I checked out Bretts site.... err, I couldn't believe that he had website buttons with simplistic lettering quite large, stating .

TRADER FEED. feed me.

have you seen it.? seems as if he's setting people up to be fed to the markets........

 

[sandpiper]

Rude,

Boy, your giving me a headache!!!! I don't know why Brett irratates you so much. He is just part of the food chain after all. It's like getting hung up about hyenas and vultures and wedge tailed eagles, is it not?

"Never trust a man who sheds his skin".

 

[SOCRATES]

This is interesting stuff Socrates... I'm not going to interrupt though... I will say that it's very difficult indeed!! You just keep on coming across new rotten bits! ;-)

And I haven't finished.......

All this endless discussion about where to place the stop, why to place it or not, how it should be placed, whether it should be a fixed amount, whether it should be a percentage of the capital employed, or the exposure, or whether it should be moved, left where it is, or removed altogether is related to risk.

If you are interested in my view of risk taking, look at post number 145 on page 4, US Day Traders Thread..

The vast majority of traders do not know how to handle risk, and consequently the management of stops to handle risk, whether real or implied.

This is because the vast majority of traders are not efficient.

The inefficient traders are apt to use wide stops.

Their argument is that a wide stop allows a position to breathe.

Inevitably as they are by self induction inefficient, they are apt to have not so high a score rate for profitable trades.

As a consequence of this problem, for them to use wide stops appears as a comfort of sorts, but is in cold reality a disaster.

This is because invariably they are apt to get it wrong often.

When they get it wrong often, a wide stop will cause huge collateral damage, particularly if they become stimulated to serial trading, which is a desperate attempt to recover losses.

The problem with this tactic is that at the same time that losses clock up, the account value is diminished and ALSO the ability to use the same exposure to recover losses.

The efficient trader, by comparison, gets it right many many more times than he gets it wrong.

He uses very tight stops. He does this because he does not expect to get it wrong often, and when he does, it delivers an information shock that may or may not be expected. The tight stop takes him out immediately with MINIMUM DAMAGE.

The irony of all this is that the efficient trader, who might in reality be able to afford using wide stops does not as a matter of professional prudence.

The inefficient trader who in reality REALLY DESPERATELY NEEDS to use tight stops for the reasons I explain above, will seek any excuse or reason not to do so, with potentially disastrous consequences.

Notwithstanding the previous, it is a source of dismay to observe how it is that individuals persist in ignoring the experience of all who have gone before us, whose recorded experiences in this regard are foolish for all of us to ignore.

Alternatively, all sorts of wheezes are discussed in an attempt to dodge this issue.

I have posted on this very topic many times, yet it falls on deaf ears.

I can only conclude that logic and reason are inexorably overwhelmed by emotions.

There is no room for sentiment, emotions or feelings in trading, yet people are either unwilling or unable to come to terms with themselves first as I detail in my previous posts on this thread and others.

To do this they have to confront themselves, an unpleasant and uncomfortable excercise.

As the great majority do not do this, hence this continuous going round the houses discussing the problem but doing everything except what is necessary in order to solve it, I respectfully submit.

And that...is the end of that....and I have finished now.

Let us hope it lands.

 

[jimmy1jag]

To do this they have to confront themselves, an unpleasant and uncomfortable excercise.

As the great majority do not do this, hence this continuous going round the houses discussing the problem but doing everything except what is necessary in order to solve it, I respectfully submit.

And that...is the end of that....and I have finished now.

Let us hope it lands.

This, in particular, was what I was refering to above.

There are a number of issues here.

1) People are reluctant to acknowledge that they have to do any of this at all- denial if you like. They will not be able to move on until they accept that something has to be done

2) How do you get to know yourself i.e. how do you pinpoint the weaknesses (and strengths- you can work from both ends of the spectrum in my view)? I haven't yet found a structure one can use to do this in any trading book. There are frameworks elsewhere, but you have to look for them.

3) How should you be when trading? What should you be doing? What is the gap between this and point 2 above?

4) Only once you've done the above, can you start to put some sort or improvement plan (for want of a better phrase) together. And only then can you start to do something to improve yourself.

And where to place your stops (and take them without question) - the original topic - is only a fragment of the whole thing.

And as a final thought, going through this process will almost certainly change your outlook on life in other areas outside of trading.

 

[SOCRATES]

This, in particular, was what I was refering to in particular above.

There are a number of issues here.

1) People are reluctant to acknowledge that they have to do any of this at all- denial if you like. They will not be able to move on until they accept that something has to be done

2) How do you get to know yourself i.e. how do you pinpoint the weaknesses (and strengths- you can work from both ends of the spectrum in my view)? I haven't yet found a structure one can use to do this in any trading book. There are frameworks elsewhere, but you have to look for them.

3) How should you be when trading? What should you be doing? What is the gap between this and point 2 above?

4) Only once you've done the above, can you start to put some sort or improvement plan (for want of a better phrase) together. And only then can you start to do something to improve yourself.

And where to place your stops (and take them without question) - the original topic - is only a fragment of the whole thing.

And as a final thought, going through this process will almost certainly change your outlook on life in other areas outside of trading.

I recommend you read through my thread "Journey from the Basement".

It is a very long thread. I started to explain seriously. Then the message was misinterpreted.
Then I tried from another angle. It didn't land either. Then finally I had to resort to use allegories to illustrate concepts. For some this did the trick. For others not. In the end I had to give up.

As a final thought .....you are right....once you go through this process you are changed forever....but you do not change as a human being even though in front of the screens you evolve as a cold assasin.....but only for the purpose of trading, thankfully.