2nd thoughts after the fact?? What is the right move?

[imstr8trippin]

Example, you enter a trade. You determine your entry, exit, and stop loss points. Soon after you enter the trade, you see that it is not going as you anticipated. However, your stop loss is not hit. The stock is moving around in a range just above your entry and just above your stop loss. What do you do?

a) Stay in the trade and hope it moves in the anticipated direction.
b) Tighten up your stop loss, as you can see it's not panning out as you planned.
c) Sell off a portion of the trade.
d) Just get out of the trade altogether.

 

[twistedheat]

I'm clearly not in any position to answer this with any form of experience, but isn't the whole point of setting/determining a stop-loss, to set a point from which you feel the odds are unfavourable of the trade going into profit?

If you are going to get out of a trade before it hits your stop-loss, then shouldn't the stop-loss have been set nearer to your entry in the first place?

Obviously what I am saying is dependent on how long you have already been in the trade and how long it has been range-bound in the stop-loss region, but generally speaking I think trading out of a position when it hasn't hit a pre-determined stop (assuming the stop was correctly set) is more a psychological reaction - FEAR - than anything else.

 

[imstr8trippin]

you may be right, twistedheat. it may be fear prompting the early exit. however, consider the following. when you enter a trade, do you not have a picture in mind of where the security should be heading? now, if you see a trade going wrong right off the start. is it better to just take what you can out of the trade? or, is it, as you said, that the stop loss should already be taking this into account and the trade should be left alone to either make a profit or get stopped out?

 

[nine]

You do exactly what your system says you should do. And that answer will depend on the nature of your trading strategy and thus your entry points. Do you enter in congestion with trend direction to take you out of it (sooner or later)? Do you enter on a breakout (which better work or not)? Etc etc.

Your trade plan is not complete. Go back and test again to determine what the answer should be because other peoples answers are NOT relevant to your situation unless all else is the same.

 

[rnicoll]

Example, you enter a trade. You determine your entry, exit, and stop loss points. Soon after you enter the trade, you see that it is not going as you anticipated. However, your stop loss is not hit. The stock is moving around in a range just above your entry and just above your stop loss. What do you do?

a) Stay in the trade and hope it moves in the anticipated direction.
b) Tighten up your stop loss, as you can see it's not panning out as you planned.
c) Sell off a portion of the trade.
d) Just get out of the trade altogether.

Personally, I favour stop-loss as a "If it hits this, the only thing that would cause me to make money is the market changing its mind". It's not your exit point, it's the worst loss you can tolerate on this trade. Your exit point should be far more carefully tuned, with pre-decided "This trade is not going to plan" criteria, IMHO.

 

[twistedheat]

you may be right, twistedheat. it may be fear prompting the early exit. however, consider the following. when you enter a trade, do you not have a picture in mind of where the security should be heading? now, if you see a trade going wrong right off the start. is it better to just take what you can out of the trade? or, is it, as you said, that the stop loss should already be taking this into account and the trade should be left alone to either make a profit or get stopped out?

What I am currently learning/being taught is the concept of volatility. Volatility, for all intents and purposes, is the "noise" within your timeframe. Therefore, if you set your stop-loss based on the average volatility of the last "x" amount of bars, then this is how you can set yourself up:

- You enter stock XYZ long @ $50.00
- You know that the average volatility of the last 5 bars is $0.20
- Therefore your stop-loss is $0.20

Now, because you know that average volatility is $0.20, if the trade goes against your long position down to anywhere close to $48.80, it can be discounted as "noise" and probability of the trade going in your direction is still higher than it not.

If the trade goes down below $48.80, then the price has moved past the volatility i.e "the noise", thus now it is more probable that the trade will go against you as it is no longer just "noise".

In stocks like AAPL or RIMM, there is no point having a $0.10 stop-loss because in 1 one-minute bar, the price can vary by $0.20 to $0.60. If you had a $0.10 stop-loss and it hit, you might think the stock is changing trend direction when in reality that is just the "noise", and the trend is really continuing in the trend direction that you originally determined.

Also, that works vice-versa. If you have a $0.10 stop-loss but the average volatility is only $0.05, you might stay in a trade too long when in reality the trend direction was likely to have changed after the trade went against you $0.05.

If I was you, I'd really consider volatilty based stops and volatility based position-sizing.

 

[hwsteele]

Example, you enter a trade. You determine your entry, exit, and stop loss points. Soon after you enter the trade, you see that it is not going as you anticipated. However, your stop loss is not hit. The stock is moving around in a range just above your entry and just above your stop loss. What do you do?

a) Stay in the trade and hope it moves in the anticipated direction.
b) Tighten up your stop loss, as you can see it's not panning out as you planned.
c) Sell off a portion of the trade.
d) Just get out of the trade altogether.

You do exactly what your system says you should do. And that answer will depend on the nature of your trading strategy and thus your entry points. Do you enter in congestion with trend direction to take you out of it (sooner or later)? Do you enter on a breakout (which better work or not)? Etc etc.

Your trade plan is not complete. Go back and test again to determine what the answer should be because other peoples answers are NOT relevant to your situation unless all else is the same.

If your system includes a stop loss then you should wait for it to be hit. If you get out early then you are not following your system like you should. If you find that your stops are in the wrong place then you need to change your system to suite. Hopefully you will reach a point where you are happy with the results.
Most of the time you will need to do some fine tuning for every part of your system not just the stops.
That's what back testing and paper trading are for.:clap:
I try to do all of my second guessing before I get into a trade. :cheesy:

 

[Chorlton]

Example, you enter a trade. You determine your entry, exit, and stop loss points. Soon after you enter the trade, you see that it is not going as you anticipated. However, your stop loss is not hit. The stock is moving around in a range just above your entry and just above your stop loss. What do you do?

a) Stay in the trade and hope it moves in the anticipated direction.
b) Tighten up your stop loss, as you can see it's not panning out as you planned.
c) Sell off a portion of the trade.
d) Just get out of the trade altogether.

I would have to agree with Nine's comments on this. Ideally, you should test different scenario's to decide which offers the better solution overall.

The ideal (and obvious) scenario is for price to move in your favour immediately after you place the trade. This is quite often not the case.

If price does hang around this Buy-SL Zone, then while the trade is still in play your money is tied up and cannot be used elsewhere. If your "system" generates a high percentage of "opportunities" (more than your capital allows) then I would personally prefer to kill the trade and move on to the next opportunity within a defined time period. How long you wait is down to the individual. Bare in mind that if you're happy to wait (and this does happen on a frequent basis) then I would suggest you could further research your entry as this would suggest you are getting in slightly too soon.

On the otherhand, if your "system / trading rules" only generate limitied opportunities then staying in for longer (or until a profit is generated / stop is hit) may be the better option. Again, this is down to the individual.

Its also worth noting that if you just move the Initial Stop upwards so as to be stopped out quicker, then your overall Risk: Reward Ratio would improve overtime. Assuming your system rules achieves a positive expectancy over time then this can be beneficial.

As a final point, TwistedHeat makes some good points regarding Volatility. Personally, I wouldn't rely solely on a volatility stop (as I believe other factors are equally important) but if you are able to incorporate volatility into your current stop then this could be beneficial. Obviously, testing will prove this out though.....

Regards,

Chorlton

 

[imstr8trippin]

great comments, guys. thx.

 

[new_trader]

Example, you enter a trade. You determine your entry, exit, and stop loss points. Soon after you enter the trade, you see that it is not going as you anticipated. However, your stop loss is not hit. The stock is moving around in a range just above your entry and just above your stop loss. What do you do?

a) Stay in the trade and hope it moves in the anticipated direction.
b) Tighten up your stop loss, as you can see it's not panning out as you planned.
c) Sell off a portion of the trade.
d) Just get out of the trade altogether.

People who trade with tight stops don't have this dilemma. Why have a wide stop in the first place if you are going to close the trade early when you can see it's not panning out as you planned? Doesn't make any sense, to me anyway. Maybe the wide stop people can explain.

 

[rnicoll]

People who trade with tight stops don't have this dilemma. Why have a wide stop in the first place if you are going to close the trade early when you can see it's not panning out as you planned? Doesn't make any sense, to me anyway. Maybe the wide stop people can explain.

Back when I started trading successfully, I was using a plan that involved trades between half and two days in length. For these, having decided my entry point and direction, I would look back over the last week or so to determine a price at which I'd consider the trade to be irrecoverable. That was my stop-loss. I would then look at closer prices at which I would consider the trade to be going bad. That gives me a much more flexible point at which to exit, while maintaining a stop-loss if it goes bad faster than I could react.

 

[montmorencyt2w]

Back when I started trading successfully, I was using a plan that involved trades between half and two days in length. For these, having decided my entry point and direction, I would look back over the last week or so to determine a price at which I'd consider the trade to be irrecoverable. That was my stop-loss. I would then look at closer prices at which I would consider the trade to be going bad. That gives me a much more flexible point at which to exit, while maintaining a stop-loss if it goes bad faster than I could react.

But maybe the market you are trading has changed since then.

 

[new_trader]

But maybe the market you are trading has changed since then.

Markets don't change.

 

[montmorencyt2w]

Markets don't change.

Market conditions do. However I misread your posting/read it too quickly, and thought it was the OP, and he had been winning, then started losing. Sorry, this was not the case.

As you were