Stop Losses

[Arbu]

I know of course that you set stop losses in order to limit your losses, and my initial view was that that was their sole purpose. But is there also a sense that they're beneficial in preventing you from losing your nerve too readily and closing out a position when it's just at a bit of a loss, and there's a real chance of it coming back into profit? I guess if you buy an index, and see a support level, for instance, it's good discipline to say you will allow your losses to run as far as that support level. Setting a stop loss can help you have the discipline to make and keep that decision.

I'd be interested to know what more experienced traders think. Simple yes or no answers might be reasonable!

 

[Masquerade]

Depends on the person. Some people can trade with a mental stop loss and stick to it whereas others need it as they'll find the temptation to run the trade further to give it a chance to work out will need to use stops to overcome it.

I don't follow all your questions, but you enter a trade at a certain point/area and you have an idea in your mind about some point or some factors which would mean your entry will be incorrect and at this point you have to start considering your entry is invalid and resolve it.

 

[rnicoll]

I think a lot of people decide their stop loss and use it as their only "get out, it's gone wrong" trigger; this is fine, makes a lot of sense. Personally, I use FAR out stop losses orders, and a closer point where I'll try to close out if it hits that. Means if the market explodes faster than I can react, still got a stop loss in there, but most of the time I've got a little discretion in when I execute the stop loss.

 

[tomorton]

Hi Arbu -

Wherever you place your stop-loss, whether mental or set, it should ensure you get out without taking too much financial loss. You should make sure that even if your stops are hit, say 10 times conecutively, you can still trade on what you have left and hopefully at least get back the money lost.

But study your market's behaviour also. If you're trading the FTSE100, a 10pt stop will be hit very frequently: a 1000pt stop will only be hit very rarely. But you might want your stop to be hit before 1000pts so that you are relased to look for another entry point, possibly reversing your original position.

I have looked at a system that gets me into the FTSE each morning. It seems that at present, a 2% target will be hit most days within the day for profit. I use a 2% stop for the same trades and the key is that the 2% stop (about 80pts) does not restrict the 2% taretgte from working. Obviously if I have an 80pt target and a 10pt stop, the stop would kill the trades before they reached +80 most of the time. So the stops and targets are related. The market tells me that I cannot increase the 2% target with this system, if I do, it just keeps hitting the stops. I may be able to reduce the 2% stop to say 1.5%, but have not done this research yet.

 

[Shanghai]

Regarding stop losses there is also an additional factor that many people do not fully appreciate. You often hear that you should limit your risk to 1% or 2% of your account for a single trade. However the implication of this is that it means that the tighter your stop the more you can risk per tick.

I have posted the attachment before but it shows my point. A while back I was trying a strategy for 6 weeks but it didn't appear to be that successful. So I went back and reviewed my trades and saw that if I had adjusted my stops to 1ATR rather than 3ATR then I would have gone from a 1.19% loss to a 5.37% profit. This is keeping the entries and exits exactly the same. A strategy that can consistently return 5.37% every 6 weeks is a damn good one in my book. This is purely due to the stop loss placement.

 

[trader_dante]

Most of the professionals I know use mental stops. They have an idea where they want to get out but like to watch the price action so they can use some discretion to see if they should actually get out at that point.

Sometimes price can trade at your stop level but it doesn't necessarily mean you should get out... it's hard to explain this to new traders because most of you can't see the order book so can't see exactly what is going on.

Let me try and explain.

Let's say you buy 3 lots of the British Pound future at 1.5000 as you believe there is support there and you decide to put a mental stop at 1.4990 (10 pips).

Now lets say that the person that is using the order book is seeing this:

1.5003 (6)​

1.5002 (2)​

1.5001 (1)​

1.5000 (1)​

(1) 1.4999

(4) 1.4998

(9) 1.4997

(5) 1.4996

(1) 1.4995

Suddenly, the market players pull their bids and offers away from the current price. Now we look like this:

1.5003 (1)​

1.5002​

1.5001​

1.5000​

1.4999​

1.4998​

1.4997​

1.4996​

1.4995​

1.4994​

1.4993​

(1)1.4992

(1) 1.4991

(2) 1.4990

Now lets say that another player that is long suddenly needs to get out of a 4 lot position. The only option he has (even though the current price is still 1.5000) is to hit the 1 lot bid at 1.4992, the 1 bid at 1.4991 and the other 2 bid at 1.4990.

If one person decides that he really needs to get out and he hits those prices then the price can jump straight down to 1.4990 and stop you out and then if the offers stay where they are which often happens, someone may hit one of the offers and suddenly we are right back where we started at 1.5000 but you are out.

A person that was watching the order book calls this a "blip" and would most likely decide (after some cursing) that this is not a reason for getting out even though their stop has been theoretically hit.

Problem is, if you can't see this, you need to do the safe thing and exit.

Now one question I see a lot of new traders ask is: "why, just before something volatile like non-farm payrolls don't I place an entry 15 pips either side of the price and just see which one gets filled as price often moves sharply in that direction and I will get the mometum on my side".

The example above shows why this can fail dramatically.

If bids and offers are pulled well away from the market which is what happens just before a figure like this, then the people that need to transact regardless just hit the nearest bids and the offers and the price can blip down and then up as people get in or get out. The price trades but its not a reflection of the figure its a reflection of the reduced liquidity. Often you can get topped and tailed on these figures.

 

[Arbu]

Thanks for all your responses. No mention of my idea that a stop loss helps you have the discipline not to cut your losses too early, so I guess the answer is that people don't see it like that.

rnicoll I agree with your approach. I want a mental stop loss together with an automatic one a long way out in case my computer goes down or something exceptional happens in the market. The trouble is I'm trading with ODL's Limited Risk Account and that inserts automatic stop losses just 0.25% away. You can move them further out, but yesterday I forgot. I would have had a mental stop about 1% away. The price blipped and I got stopped out very quickly. This was on EUR/GBP and a 0.25% movement on that probably happens every minute at the moment, so the initial position of the stop loss seems ridiculous. Maybe time to move onto a different account.

trader_dante, can you explain what your lists of figures mean? I've got some idea, but I'm not quite sure.

Since starting my earlier thread on Wednesday morning, I've made another £100 on stock trading and £300 on GBP/EUR, so still going well. But I'm kicking myself for mistakes I've made.

 

[trader_dante]

trader_dante, can you explain what your lists of figures mean? I've got some idea, but I'm not quite sure.

Arbu,

The central column represents each price. We see it as a "ladder". It's called that because each pip/tick above is a rung UP on the "ladder" and each one below is a rung DOWN.

The brackets in my example that appear to the LEFT of each price are the number of contracts that are being bid at each price and the number to the RIGHT in brackets is each number that is being offered.

So, for example if I see this on the EURO future:

1.4700 (9)​

1.4699 (17)​

1.4698 (21)​

(98) 1.4697

(50) 1.4695

It would appear that short term buyers are about to overpower sellers and drive the price up.

 

[arabianights]

1.4700 (9)​

1.4699 (17)​

1.4698 (21)​

(98) 1.4697

(50) 1.4695

It would appear that short term buyers are about to overpower sellers and drive the price up.

Just to expand on that (not for your benefit t_d, but for others reading who aren't used to this stuff) you might reasonably conclude that the 97 bid is a real order, not especially price sensitive because there is no bid at all at 96; therefore it would be a great idea to lift the 98s and 99s to front run the 97s and offer them all out at 00, as the 97 bidder probably needs to fill his order.

That's assuming everything else is equal, of course, but you get the idea.

 

[trader_dante]

Just to expand on that (not for your benefit t_d, but for others reading who aren't used to this stuff) you might reasonably conclude that the 97 bid is a real order, not especially price sensitive because there is no bid at all at 96; therefore it would be a great idea to lift the 98s and 99s to front run the 97s and offer them all out at 00, as the 97 bidder probably needs to fill his order.

That's assuming everything else is equal, of course, but you get the idea.

This is actually quite amusing to me because I left 96's out as an oversight.

You're good Arabian!!

 

[Arbu]

Arbu,

The central column represents each price. We see it as a "ladder". It's called that because each pip/tick above is a rung UP on the "ladder" and each one below is a rung DOWN.

The brackets in my example that appear to the LEFT of each price are the number of contracts that are being bid at each price and the number to the RIGHT in brackets is each number that is being offered.

So, for example if I see this on the EURO future:

1.4700 (9)​

1.4699 (17)​

1.4698 (21)​

(98) 1.4697

(50) 1.4695

It would appear that short term buyers are about to overpower sellers and drive the price up.

Thanks, that seems a fairly fundamental thing to know about what the "price" actually is, and I'm surprised I haven't seen an explanation before. Presumably to get access to the order book, you have to pay someone?

 

[PokerBrat]

Arbu, to answer your initial question, no I don't think that is a good idea. What happens is you end up relying on your stop loss to manage any trade that goes into loss, rather than analysing the new information and responding to it.

When a trade goes into loss (or into profit, or even goes sideways) you should be reviewing what the price action means in comparison to what you expected and reacting to the new information.

When I first started I would sit there watching a trade go into loss and I would think "Oh well, it's only another 5 points to my stop, it might come back into profit". How many of those trades do you think turned around and went into profit? Not many.

It does depend on your trading strategy and entry set up, but I look for high probabilty/low risk entries, so I expect the price to go in my direction very quickly. If it doesn't then something is wrong with my assessment and I will often close before my stop is reached.

A few quotes I have on my office wall:

"Always assume you are wrong, until the market proves you are right"
"A losing trade rarely turns into a winning trade"
"A penny saved is a penny made"

Everything I have ever read by successful traders places great emphasis on avoiding or minimising losses. Relying on your stop loss to overcome your fear of losses, doesn't seem to me to fit into that mindset.

 

[FXSCALPER2]

Just to expand on that (not for your benefit t_d, but for others reading who aren't used to this stuff) you might reasonably conclude that the 97 bid is a real order, not especially price sensitive because there is no bid at all at 96; therefore it would be a great idea to lift the 98s and 99s to front run the 97s and offer them all out at 00, as the 97 bidder probably needs to fill his order.

That's assuming everything else is equal, of course, but you get the idea.

Or you can be the 97 bidder spoofing.

 

[Arbu]

Arbu, to answer your initial question, no I don't think that is a good idea. What happens is you end up relying on your stop loss to manage any trade that goes into loss, rather than analysing the new information and responding to it.

When a trade goes into loss (or into profit, or even goes sideways) you should be reviewing what the price action means in comparison to what you expected and reacting to the new information.

When I first started I would sit there watching a trade go into loss and I would think "Oh well, it's only another 5 points to my stop, it might come back into profit". How many of those trades do you think turned around and went into profit? Not many.

It does depend on your trading strategy and entry set up, but I look for high probabilty/low risk entries, so I expect the price to go in my direction very quickly. If it doesn't then something is wrong with my assessment and I will often close before my stop is reached.

A few quotes I have on my office wall:

"Always assume you are wrong, until the market proves you are right"
"A losing trade rarely turns into a winning trade"
"A penny saved is a penny made"

Everything I have ever read by successful traders places great emphasis on avoiding or minimising losses. Relying on your stop loss to overcome your fear of losses, doesn't seem to me to fit into that mindset.

Thanks - I think you were the first person to answer the question! I posted the question after a trade of mine went very close to the stop I had set before coming back and then going well into profit. With a previous trade, I closed out before reaching the stop and lost the profit I would have made when the index later reversed.

I tend not to see high probability trades. I find myself thinking, "My view is that there that the market is going to go down because of X and Y, but it could go up because of A. If it does go up I think that it won't go beyond a certain resistance level. The chance of a profit is enough for me to be willing to risk a loss." And I set my stop less where I see the resistance level. So the stop loss helps to remind me that I have accepted certain risks, for good reasons, and ought not to go back on that too readily. But I note what you say, and appreciate that, if I find it appropriate to do this with my trading style, it's important still to keep reassessing the position.

 

[dilesh23]

Online Trading - Fast, Reliable, Feature-Rich Platform - superior execution, support, quotes, chats

ive been trying this demo for a few months now, using the DOM - ladder that comes with it and was wondering if anyone with the TT could tell me how realistic it is compared to it. I showed it to a friend who uses TT and he was suprised to see, what he reffered to as 40 lots being traded after 5 on the ftse. So far it just looks like a list of flashing numbers and lights but ive noticed a few of the things hes told me to look out for, like how big orders act like a magnet, noticed a few spoofs with orders being pulled at the last second, but any more advice on what to look out for etc would be greatly appreciated.

 

[dilesh23]

cheers for the PM semm, i tried to send you a thank you for the links and indepth answer but it wouldnt go through a few things to get my head around but im working on it Merry christmas and i hope you have a wonderful New Year

 

[Aspire]

Or you can be the 97 bidder spoofing.

I think Arabian's point was that a spoofer would be more likely sitting on the 96's

 

[arabianights]

innit

 

[MrGecko]

Online Trading - Fast, Reliable, Feature-Rich Platform - superior execution, support, quotes, chats

ive been trying this demo for a few months now, using the DOM - ladder that comes with it and was wondering if anyone with the TT could tell me how realistic it is compared to it. I showed it to a friend who uses TT and he was suprised to see, what he reffered to as 40 lots being traded after 5 on the ftse. So far it just looks like a list of flashing numbers and lights but ive noticed a few of the things hes told me to look out for, like how big orders act like a magnet, noticed a few spoofs with orders being pulled at the last second, but any more advice on what to look out for etc would be greatly appreciated.

I can't say that reading the DOM + T&S makes up a significant part of my trading as I'm not really a scalper - but I do follow it at the times I think a larger move is beginning to play out. It should go without saying that the only lesson worth learning is the one you teach yourself, from a few thousand hours - but until then...

http://www.trade2win.com/boards/level-ii/37726-levelii-vs-times-sales.html#post492010

Merry Christmas one and all. I picked up my Goose today and it's bloody massive :cheesy:

P.S. Back in the good old days, Grantx posted some very useful stuff with screenshots... unfortunately he probably succumbed to the kind young folk who left his car on bricks or similar. As they say, it is no coincidence that "Manc" rhymes with "w@nk".

 

[rtsurvivor]

I was a commodity trader for a lot of years. A "Stop/Loss" was a rule of the road. A mental S/L was considered as a "No S/L"

Well, I am finding out that the FOREX is a completely different playing field. From what I can tell is that the S/Ls are thrown in as a scavenger hunt prize for the "Dealers" that are not really nice people. I could be wrong on that, but then again, I could be right. :|

I've been doing a lot of "DEMO" trading and a lot of reading. I traded price patterns in the commodity markets and the S/L was a critical part of my trading plan. I see the same patterns here in the FOREX but I'm not all that sure how how effective the S/L would play out in an actual trade.

The rules seem to be a bit different. :-0 Maybe it's because of the short term trading that is the nuts and bolts of the FOREX.

At any rate, I still have a lot to learn about this market and this forum seems to be a good place to see what's hiding in the shadows.

Good trading to all and to all a Happy New Year. :clap:

RT... :clover: