How much "swing" do you attribute when setting your stop loss point?

[krosfyah]

Hi, i'm new here, and i'm sure this has been discussed many times on here but i have done a search and can't find any posts (probably because i'm searching on the wrong/inaccurate search terms).

I want to understand the in's and out's of how much "swing" you build in when setting a stop loss. There must be a general formulaic structure to this, and i'm keen to learn about what this might be. I understand the 3:1 risk reward ratio, so how does the stop loss setting swing build this into the equation when determining the point it should be set at.

If anyone could either link me posts that go into detail, or provide a very simple methodology they use, i would really appreciate it.

NB its specifically the amount of swing to build in that i'm curious in i.e. how do you account for particular volatility within whatever you happen to be trading.

Many thanks!

 

[new_trader]

Hi, i'm new here, and i'm sure this has been discussed many times on here but i have done a search and can't find any posts (probably because i'm searching on the wrong/inaccurate search terms).

I want to understand the in's and out's of how much "swing" you build in when setting a stop loss. There must be a general formulaic structure to this, and i'm keen to learn about what this might be. I understand the 3:1 risk reward ratio, so how does the stop loss setting swing build this into the equation when determining the point it should be set at.

If anyone could either link me posts that go into detail, or provide a very simple methodology they use, i would really appreciate it.

NB its specifically the amount of swing to build in that i'm curious in i.e. how do you account for particular volatility within whatever you happen to be trading.

Many thanks!

Where to place a stop is almost like asking when is the best time to buy and sell. There is no real correct answer or formula. It is a skill that you must acquire through experience.
I suppose a Rule of thumb that most people would suggest is that stops should be placed in 'logical' zones. Eg/ If you were going long you would place a stop just below a previous low or support level and going short you would place a stop just above a previous high or resistance level.

I would recommend you familiarise yourself with fibonacci retracements, it may be a good starting point:

http://www.swing-trade-stocks.com/fibonacci-retracements.html

http://www.investopedia.com/articles/technical/04/033104.asp

 

[TWI]

I would investigate volatility adjusted stops using something like ATR's. When you obtain a signal adjust your psoition size based on this dynamic stop. You can make it more complex by combining the vol adjustment with support/resistence levels of price or indicators but for me important step forward with stops is to ensure they are appropriate for the current price action.

 

[krosfyah]

I would investigate volatility adjusted stops using something like ATR's. When you obtain a signal adjust your psoition size based on this dynamic stop. You can make it more complex by combining the vol adjustment with support/resistence levels of price or indicators but for me important step forward with stops is to ensure they are appropriate for the current price action.

Thanks and excuse my lack of knowledge - but what is an ATR?

Also can you please clarify what you mean by this:

"to ensure they are appropriate for the current price action."

Thanks friends!

 

[TWI]

ATR = Average True Range (google it and will get better description than I can give). It is one measure of market volatility and can be used as a multiple to find an appropriate stop in a market which is more effective than a value which does not adjust to higher/lower or more/less volatile price action.
It took me a while to figure out how useful it is but now I use it for just about everything stop related and quite a lot of profit related stuff too.

 

[krosfyah]

ATR = Average True Range (google it and will get better description than I can give). It is one measure of market volatility and can be used as a multiple to find an appropriate stop in a market which is more effective than a value which does not adjust to higher/lower or more/less volatile price action.
It took me a while to figure out how useful it is but now I use it for just about everything stop related and quite a lot of profit related stuff too.

Thanks TWI, just off to read up on it now!

 

[qwerty1]

The following chart with commentary could provide some insight. I've noticed that traders new to this game typically want or seek a quick solution to their trading woes, when in reality there is a learning curve that is inherent.