Correct Stop Placement

[cj12]

Stops will hurt you if they to close. The closer you stop, the more you will get stopped out. You stops should be beyond or past random fluctuation.

They must be far enough away that if they are hit, it will be because of real -not -random activity in the market..

Also You will not find this in any books. If you got a mechanical trading system, stops can ruin the performance. if holding 1 to 2 days, just place 200 point stop, in case of something like 9/11 happening if trading the Dow.

Im not the only one with this view mark,d, cook (Market wizards) who trades the s&p uses 6 points stop for a 3 points profit.on high probability trades.

Is this why, 90% of you lose.You stops may be to near, you entry price.?

CJ.

 

[tradesmart]

Interesting and controversial subject CJ…..

I use 20point stops to trade the Dow, but plainly this system relies on ‘precision’ entries…….

If I get stopped out, it is just because I had a ‘wrong’ entry, so I just look for another one….

I try to look for trades that will have the potential for 60+ points to give a 1:3 risk/reward ratio…..

I’m not always right, but the damage is restricted to 20 points which is not too difficult to get back and is not too much of a psychological 'downer'....

I think that ‘wide’ 100/200 point stops are inviting disaster in the end – the index may ‘criss cross’ a certain trading range repeatedly so you may get away with it several times, but this is ‘negative reinforcement’ – you are trading on hope and luck…

With these volatile instruments, they will suddenly lurch violently from a narrow trading range as we have seen with the Dow in the last few days, and a wide stop can see you holding a deeply underwater position, just hoping for a return to your entry point….and this can damage your trading for potentially days/weeks while you are waiting…..

And if you add to an underwater position you are likely to compound the damage if it does run seriously against you, and in the end you may be desperately moving your stop to stay 'in the hunt' because it will destroy your account to get stopped out - far too much to lose...!

In a nutshell – give it too much rope and it could hang you…

Keep a tight stop and restrict the potential damage imho

 

[Trader333]

cj12,

In my view it is highly unlikely that the reason why 90% of people lose money trading is down to the placing of stops that are too tight. It is far more likely that it is because no stop is placed at all although I do agree with you that placing them too close would cause an overall losing position.


Paul

 

[cj12]

To Tradesmart

What I wrote above, is based on holding for 2 days, so in effect my stop is 2 days. I have done extensive seven years of testing. and on this particular method it works better, without stops. It's all about high probability trades. and I look for big ranges.

Also with this method, it's about using correct money management, in knowing when to step it up and reduce you postions.if you cant utilise size, you cant make money, no matter how good you are, at reading the market.For daytrading I do tend to use tighter stops, if im scalping for 10 to 15 ticks.

Bottom line,all im saying, although controversial, stops can ruin a mechanical day trading system.I done a little back test ,over the last 12 months,and if you had invested 2,000 quide it would have made you 15,500k.and the account never went down below 1500 in the first few weeks.

CJ.

 

[TheBramble]

I agree with everyone. Seriously.

1. A tight a stop gets you out more often than you would in retrospect have wanted.

2. A large stop will keep you from being whipsawed and keep you in the game, but will give you bigger losses when you do get stopped out.

I personally play option-1, which is why I'm only in the 50-60% W:L voting range. But my losses range (typically) between 7-25c and my winners range (typically) between 35-150c.

In response to CJ's point about a wide (200pt!) stop on a day like 9/11 - I wouldn't want to stay in any trades in those circumstances - I'd just want out - at minimal cost. I am sure there are big, beefy traders out there who double their pot in those situations, but it isn't for me.

 

[wisestguy]

" In response to CJ's point about a wide (200pt!) stop on a day like 9/11 - I wouldn't want to stay in any trades in those circumstances - I'd just want out - at minimal cost. "


hear hear .


the problem I have with wide stops is as you say , they increase the size of your losers , big no no for me .

 

[mokwit]

Interesting. I also use a negative 2:1 stop ratio in range trading the HSI which is thin and volatile. It corrsponds roughly to 3 Standard Deviations and basically if it goes beyod 3 SD from mean it probably means I am fading a breakout that is not going to fail and every now and then I take a hit, but this is offset by overall win rate and the times I move stop to B/E once the initial rush is over and my position has moved beyond the random noise range In reality I need that leeway for those sloppy entries that come good if they have the leeway or the stronger than expected rushes. Entries are made based on SD, pattern and volume and where we are relative to intraday buy/sell cycle. Tighter stops i.e. 1:1 just get me stopped out by noise. In actual practice if I am not asleep at the wheel the actual ratios are probably closer to 1:1 or even 1:2 positive. Also I am not rigid as I look for a natural market stop and will move stop up or down if the S/R situation seems to offer a better deal. Disclaimer don't try 2:1 stops at home, or at least not before talking with a grown up.

 

[TWI]

If your scalping spreads your stop is 0 and profit 1 tick. That works OK. As for position scalping that is average down twice then out, seems to work OK for the people I know doing this.
For mechanical systems I do not think tight stops can work. Due to the nature of a mechanical signal painful drawdowns are inevitable at times, you just have to maintain faith which is a real JOB type biblical effort at times. I do not think that static point value stops are the best ones unless they are there to protect against complete disaster scenario. In mechanical systems they are often the easiest to control and understand as you avoid slippage on exits and the dynamic ones can also be difficult to code and so fully understand implication.
As for looking at a chart and making a decision type stops I find horizontal support/resistance -/+ 10-15% resp. appropriate.
Why stick with any fixed ratio?
Most important thing in my book is knowing your outs before you are in.

 

[darktone]

Most important thing in my book is knowing your outs before you are in

To true.

I think tight stops are fine (for FX at least not sure about the variable spread stuff), if you have a problem using them then id suspect the trouble is more to do with bad entry than having stops to tight.

Just a personal thing but ive never got on with 'large' or last resort stops, large stops for me seem to get just nicked and trading a manual stop i find hard work mentally as well practically (slippage at market/platform failure) let alone having to be quick enough to get out and cancel your last resort stop, all at which time your at the mercy of your connection etc and to some extent your broker.

dt

edit: forgot to mention money management is far easier if you KNOW what your at risk for.

 

[DaxTrader]

Correct stop placement = the place where if the market trades there, your thinking is proved wrong (this time)

That could be 1 tick or 200 ticks. In some ways it feels easier to look at a chart and say " The market should not go through this level" and mark it on the chart. Then look for an entry.

If you see it trading near there , aim to get on with the smallest move to prove you wrong.

 

[wisestguy]

there's no definitive answer is there ? no matter what system you use , sometimes you are going to end up disappointed . too close and you get stopped out too much , too wide and the losses are big .

somewhere down the line you have to make a definitive decision , whatever label you want to give it .

the other choice is to hit and hold ( no stops ) , which I know even some pros use . as for me I could never stomach this approach , I did try it , hated it .

 

[mokwit]

BTW FWIW Kaufman seems to have done some fairly extensive backtesting and basically found that it all evens out over a big enough sample size* ie you get stiopped out say once on 100 points twice if you use 50 points, 10 times if you use ten points and 100 times if you use 1 point. (all numbersarbitary/illustrative). Can't remember the strategy used as the model but I find it hard to believe skill strategy timeframe and other aren't major variables in there somewhere.

* maybe bigger sample size than youyour account could stand in reality.

 

[cj12]

Does system trading work better without stops. I looked at my systems being 80% mechanical, back in the heat of trading the Dow in good old volatility 2001, when the Dow hit the all time high,.Pluss the September 11 crash. Would any of you trade without a stop when the dow could move 300 to 500 point in 1 day. scary

Well, this system worked well without a stop. Considering a 1000 pound account, year end it was up to 17.230 thousand pounds.

Somthing to think about what causes loss, is it greed crying for profits and then geting sloppy in money management ,or The desire for profits can make you lose in the game..or is it, placing stops.to close???

What I do know is.WINNERS THINK DIFFERENT

CJ

 

[wisestguy]

winners do different ?

 

[Trader333]

cj12,

You seem fixed on the idea that it is only the placing of stops too close that is causing traders to be net losers and this is most definitely not the case for the majority of people who do lose. If you have read the comments by CapitalSpreads on this website, they have said on more than one occasion that it is because no stop is placed that makes more of their customers lose as opposed to placing of stops too close. In my view placing stops too close affects a relatively minor number of the total of net losing traders.

Like yourself I have also done tests on position trading strategies without placing of stops and, as you say, you can make very large profits. But the downside for many is that they would have had their account wiped out before the profts came in. I attach a screenshot of a strategy I did where the profit was 2.8M that started with an account size of just 10K but it is untradeable in my view because of the large drawdown.


Paul

 

[firehorse]

Correct stop placement = the place where if the market trades there, your thinking is proved wrong (this time)

That could be 1 tick or 200 ticks. In some ways it feels easier to look at a chart and say " The market should not go through this level" and mark it on the chart. Then look for an entry.

If you see it trading near there , aim to get on with the smallest move to prove you wrong.

I'm a newbie but this echos my current view.

You place the stop according to your strategy / map of the market. If you market hits your stop, then your strategy / map was wrong. If your strategy doesn't have a stop, but you consistently make money, then you've got a good map If you have a stop and consistently lose money, then your map could be improved

 

[TheBramble]

BTW FWIW Kaufman seems to have done some fairly extensive backtesting and basically found that it all evens out over a big enough sample size* ie you get stiopped out say once on 100 points twice if you use 50 points, 10 times if you use ten points and 100 times if you use 1 point. (all numbersarbitary/illustrative). Can't remember the strategy used as the model but I find it hard to believe skill strategy timeframe and other aren't major variables in there somewhere.

* maybe bigger sample size than youyour account could stand in reality.

By that logic, if you set a 1000pt stop - you'd rarely get stopped out, but you could be into some serious drawdown for an indeterminately long period of time.

 

[mokwit]

...........and while you were in that drawdown there would be an opportunity cost as you would not be exiting a trade when it had obviously failed and Most importantly your capital would be tied up for the period of time in which you did not know wether it had failed or not. There is an opportunity cost to waiting for a position to turn around and go in the direction you expected. I suspect most traders fail to realise how performance is affected by having capital tied up in non performing positions. Also look at Copper from the 1880's till today (someone posted it) - if you were short eventually you would have been stopped out. Stops also serve to stop you from tying up your capital while you wait for a trade to 'turn around' (assuming it does). If I put on a trade and it doesn't do what I expect WITHIN THE TIME I EXPECT I get out. The point is if it's not doing what I expected my capital is tied up in something not producing a return, and also if it doesn't do what i expect then it can either stay flat in which case my money would be better off in the bank as no downside risk so i should be out, or it goes against me in which case I should also be out. Obviously the normal volatility of the timeframe you are operating in is a factor as an initial loss is routine after entry. Note that I may differ from e.g. trend followers as am looking to enter even an established trend on a sharp movement and therefore high risk:reward entry eg a consolidation/continuation pattern. In this business you make money by not losing money (but you have to risk money).

 

[wisestguy]

rule#1

never meet a margin call !

 

[LION63]

I prefer to use two criteria for my trades - ROCE 10 to 20% and Risk/reward 7:2. I know that most people talk about ratios of 1:1 or more and very tight stops of say 20 points on the DOW but that certainly would not fit in with my trading style and I would end up being decimated within a shor time frame. Whilst I certainly would not advocate trading without stops, it is sometimes better to ensure that mild gyrations do not adversely affect one's position. For those that follow and trade the FTSE 100 constituents, you will realise how difficult it is to have a practise of having say a 15 point stop in AstraZeneca to make 15 or more day trading. I might give it 30 to 40 points in order to make 15 but a wise man once told me that nobody ever went broke making profits. Neither will I get stopped out on a widened spread. And if I am wrong I am wrong.

Before people start saying it is impossible to make money doing that, think again. You end up with a much higher strike rate than most traders and your capital/drawings grow over a period of time.