Struggling with Stop Loss

[comino]

Hello Everyone.Could someone please help me,i seem to struggle in finding a stop loss that i can execute.I Spreadbet the Dow using 5 min chart for entry and average trades is ratio is around 3 to 1 and sometimes i can increase this.My problem is that i give all my gains back in a single trade so im struggling to move forwards.It seems i have a problem getting out of a losing trade until its too much pain to take,i understand this to be a problem with not accepting that i'm wrong.Iam now at the stage that if i trade and don't identify and execute a stop loss then i'll continue to loose money.
I've tried different stop loss format eg, 10 points from entry also if price closes or opens above or below a previous 5 min candlestick,and have also gone to a timed stop loss,but have failed to implement these for a period of time.
So what i'm hoping to find is a suitable stop loss criteria that i can use on the Dow.I have enclosed a chart on the dow today where i entered to buy at 10,400,i was 10 points in profit and then the market came back down as i thought at the time to retest the 10,400 level,i did not consider at this time to exit but i quickly found that this was wrong when the price drove below,i then started discounting what i was seeing because i expected a bounce up at anytime,im breaking another rule because im trading what i think and not what i see.Anyway i eventually got out at im sorry to say 10351.Im hoping that someone could come up with a suggestion for a fixed point stop loss for evey trade on the Dow.Please excuse me if this request seems a bit strange but i will be very appreciative of any suggestions,thank you all.
Fantastic website this.

 

[qaza]

You must identify your stop loss level when you enter the trade and you MUST honour your stop

Sounds easy .......................its not !

but thats what you have to do

All the thinking about the stop must happen before you put the trade on, not while you are in the trade

 

[Trader333]

From what you have said this appears to be a psychological problem rather than one of technique. I suggest that before entering a trade that you plan it in terms of where you will enter what your stop will be and where you will exit to take a profit.

Once you have made your plan Execute it without any consideration for how you feel whether you win or lose.

This exercise is essential to successful trading and should be done every time until you can trust that you will follow what you have planned to do.

I would also suggest reading "The Disciplined Trader" by Mark Douglas. It is a bit heavy going but there are some excellent excercises to address the very problems you are encountering.


Paul

 

[frugi]

Most traders have been in the exact situation that you find yourself; do not despair comino.

If you regularly enjoy 3 winners for every loser you are, in principle, trading extremely well. You interpret the chart(s) to your advantage and act on your knowledge and intuition with skill. Trouble is, you now have to deal with what is in some ways the easiest and in others the hardest part of trading. Your problem is, quite simply, to ensure that each loss (+ commission etc.) does not exceed the previously hard won 3 winners (-commission etc.) and keep ensuring this for the rest of your trading life.

I believe the solution to your problem lies not in a stop loss derived from an arbitrary number chosen for you by a stranger, but in your own psychology.

You must be sure in yourself that the level of stop loss you choose is one with which you are entirely comfortable and one which will make you exit a trade time and time and time again without flinching, hoping, delaying etc. In some ways , you answer your own question in your post. You state the problem and acknowledge what you are doing wrong. So act differently! Easy to say, hard to put into practice, I know.

Confidence in your stop loss comes from knowing 1. you will always exit when it is hit, 2. knowing (or at least being confident that) over time these losses will not lead to an overall loss, 3. that the level of stop loss is suitable for your chosen time frame, current volatility and style of trading and that 4. that your account will not be destroyed by a run of stop losses. If you can answer yes to these 4 then you will one day stumble upon a run of 4 or 5 losses in a row and it won't bother you - you'll close each one out on the predetermined figure and move on, unruffled.

As a very rough guess, given that are trading Dow intraday on a 5 minute chart stop losses probably shouldn't be more than 30 or less than 10, depending somewhat on your route into the market. Add 10 if you're spreadbetting perhaps. I am assuming you don't hold positions overnight.

Between 10 and 30 points? That's a bit vague!

So, quickly onto the next step. Setting a stop loss should of course, unfortunately, include a dose of maths. Work out your average win. If you win 3 out of 4 then your stop loss MUST first be less than 3 times your average win to come out ahead in the long run. Accounting for commission, slippage etc. a safe margin might be 2 times your average win, ideally less.

Now money management. If you generally win 3 out of 4 trades and trade 1000 times in a row, the number of maximum consecutive losers you will suffer in any one streak is likely to be 5. Thus also ensure your stop is small enough so that you can take 5, or whatever, losses in a row without losing more than, say, 20% of your total capital. You have to be able to stay in the game.

Adjust stake and stop loss until you are comfortable taking losses without the slightest bother, and, equally, riding your porfits till you have gained your due reward. I get the feeling you're already doing the profit part right, so just choose a stop level suitable to your style of trading, ensuring the maths will not wipe out your account over time given a certain win/loss rate and then stick to it and take each loss with pleasure. Ironically, you'll probably find in a while that it's running the profits that really cause stress

HTH & sorry for the possibly patronising ramble, I'm not feeling as sharp as a Rosso at the moment ;-) Others seem to have covered it rather more succinctly too!

"From what you have said this appears to be a psychological problem rather than one of technique." Beautifully put T333.

 

[flipper]

hi all
cant offer much advice but if its any consolation do the same thing myself and probably plenty more people do. probably best to take any profit going and never lose more than 20 points. kick yourself after for getting out to early for profit but better than getting out to late with your losses. not a very technical answer but its my starting point for controlling my trades in a simple manner until i learn the finer points. feels good when you did the right thing. its the hanging on for more profit(and losing it) or waiting to reduce losses (and losing more) that hurt the most

 

[comino]

stop loss reply

Thank you all for your input,yes it is the hardest hurdle to get over
and there is definatly an psychological element involved.As you suggested the main thing is to find a stop loss that suites myself and my trading.The honoring suggestion is very important indeed and that is where the conflict arises in this simple task but i find that this term can help me in staying focused on honoring my exit
i'm very stubborn in staying in a losing trade,just need to change this stubborness around.Thanks Frugi for your input i need to get to work on this formula straight away and see what i come up with,one thing is that every trade is different with regards to the price action for 5 min candlestick eg, this is where i've struggled to implement a visual stop loss,what you are saying is that if i work it out mathematicaly then with regard to probability and trade ratio it could be easier for me to accept my pre determined stop loss and executing it.Basically its all to do with being responsible for your own descions at the end of the day.
Once again thank you loads for your help with this matter.
Regards
Comino

 

[donaldduke]

comino,

I know exactly how you feel. Ive made all the mistakes you have.

This is the way we all learn.

Ill tell you what you are doing wrong. You are losing discipline!
Why do you lose discipline? The reason is because you are
playing a negative expectancy game. A game you cant hope
to win really.

You should not be daytading the Dow via an SB firm in
the current low volatility climate. You are using a five minute
chart so i assume you are making several trades a day.

How do you expect to learn when you are playing a negative
expectancy game after transaction costs (ie the 5 point+ spread).
You just end up getting frustrated and losing Discipline.

The true range of the Dow, is just not big enough for you to cover
the spread you are paying. There is a big move about 1 day in
every 5 when the market moves more than a 100 points (like today).
A few years ago it would have been possible to day trade the
dow with a five point spread everyday. But not in the last year.

Just think about it for a minute, if you make say 4 trades a day
(paying a 5 point spread per trade). Then every month you have
to make around 450 Dow points just to cover the spread!
Thats not as hard when the dow has a 300 point range day
almost everyday, but do you remember the last time the dow did
that?

Your options are:
1. Day trade the Dow futures via a broker (not tax free).
2. Position trade the dow instead of day trading. Looking to
make a minimum of 50 - 100 points for a win on every trade.

When day trading the Dow means you can make atleast 50 points on all your intraday trades then you can think about going back to SB daytrading.

 

[jpwone]

Comino

you could try a bit of reverse psychology. As frugi says, apply the maths and work out what the stop needs to be on average to stay profitable. Then work out what it should be to breakeven. Somewhere between those two is a figure which you use as a not to exceed failsafe stop. Place this stop on the system when or immediately after you open the trade. You are then covered if the discipline slips and you do not apply an earlier stop and you are also covered if something untoward happens in the market (forgotten a bit of news was coming out etc. ).

Heres the phycholgical bit. Your mental trading stop should be somewhere before your fixed failsafe stop and will vary with the trade ie. just above or below support or resistance for example. Every time you take a trading stop you will have saved money by not letting it run to your failsafe stop.

You have saved money and thats got to feel a lot better than losing it.

Edit. Got to say I agree with DonaldDuke. Two/three years ago I was averaging 1400 points a month off the Dow. I rarely trade it now. The SB companies have widened the spread (in one case from 4 to 6 points) and the day range has reduced significantly. I found I was spending a lot of time looking for trades in the past year and on average was breaking even or going backwards. I still have the occassional pop at the dow but I spend a fraction of my time on it and the trades I do place are those I regard as high expectancy ie. I'm expecting a good move. I will chop these trades ruthlessly if the move does not develop in a reasonable timescale. Once the expected return starts to look poor when I consider the time taken to watch and manage the trade then I'm out.

 

[Naz]

How do you expect to learn when you are playing a negative
expectancy game after transaction costs (ie the 5 point+ spread).
You just end up getting frustrated and losing Discipline.

The true range of the Dow, is just not big enough for you to cover
the spread you are paying. There is a big move about 1 day in
every 5.

For me i'd rather play the Dow as i do using the Diamonds.Where using a level 2 direct access screen i can capture spreads rather than pay them and many times they dont exist at all.

Many Dow traders can feel they've done quite well with a 100 point move in the day but in a strong Nasdaq stock that can be done in 20mins at times.Rather be restricted to just trading one item like the Dow.Why not look at thousands of stocks instead.Where every day there are strong moves both up and down to be found.(Use a scanner to find them.)

Trading one instrument can be frustrating when the moves aren't there,leading to over trading due to boredom.Which just incurs paying more spreads making more costs.

Looking at many stocks means hunting for great setups,sometimes being spoilt for choice and only picking the very best, rather than picking something mediocre just for something to do.

As NB would say this is my opinion and yours might be completely different.

 

[TheBramble]

Naz, what scanner (s/w) do you use and what do you specifically look for in your scanner criteria?

If 'big movers' are the target do you look for those that have already exceeded their ATR or some other factor(s)?

 

[Carlo1]

You have had some really good advise offered to you on this thread, one thing that you may need to be aware of though is this. When you do start to select a stop loss point prior to trade entry and take that stop if it's hit, then it's unlikely you will still be achieving 3 winning to every 1 losing trade. To be able to maintain that kind of ratio, you either need to be

a) an extremely gifted trader
or
b) your average win is much smaller than your average loss.

Many, perhaps even the majority of profitable traders have more losing trades than winning trades, but the average wins are larger than the average losses. There is however a trade off that occurs, the higher percentage of winning trades one has, generally the smaller those wins are in relation to the losses.

A few traders can achieve a high percentage of winning trades (60% or more) and have their average wins around 1.5 to 2 times their average losses, but these people are exceptional.

 

[mikamisun]

Hi Comino, If you can get a copy of the TRADERS mag March- April 2004 vol 2 Issue 3-4 see page 28 -29 by BO YODER
He has the possible HELP in his article that you need. I only trade the DOW and I feel that a lot of what he says in the Mag can be used for the DOW, I do not day trade the Dow anymore !But trade it from 2 days to 21 days as this gives me time and time gives the Dow more movement. Best of luck for the future

 

[juanbyte]

Hi Comino

Do you spreadbet or trade futures.

If you trade futures with IB there is a piece of software available where you can set your stop-loss and when you enter a trade a stop order is also placed in the market.

This means you do not have to place the hit the button again where you tend to freeze.

The software is free atBracketTrader.com

Another idea is to have a time limit, if you are not in profit after say 7 minutes close out. I have found this better than using a stop-loss and reduces losses

Hope this helps

 

[shariyud]

As to a stop loss , my belief and have in fact developed
a unique analysis to make this decision . In fact it is based upon
the geometry of the situation . As this has to be automated,
I could not suggest this unless you were working on it with
me . But to give you an idea that is related to the range,and what I do,
metastock devides a range in quadrants . Use you imagination
in this procedure . That is if trading an idex you might use a quadrant
portion up or down for your stop. Not so , if you are
trading a stock or com. that move greatly in a day.
Maybe you would use 3 of the 4 quadrants.
In part you and I could talk about trial and error but
since what I would do has to do with the range , this
is what we could discuss. You see trading is an art ,
ever if you have a logical method . Eg, I was just in Sencient
a stock traded on the NYSE it was moving down in slow
amounts , and hit one day up in major point move ,
in climax volume . The shorts had so many stops the
climax move up was huge so this thows out the normal
bal out of the window.The stop should have been stop
and reverse. - As I can't put this type of order in
with my broker ,stop and reverse , this is academic for me .

 

[comino]

many thanks

Many thanks to everyone for their replys and input from all the information i now think i have a solution just need to honour it now,thanks again everyone.
Regards
Comino

 

[Bluewave]

My 2 pennies worth: yes, stop losses often seem like a lose-lose method. If you set them they inevitably get hit and you lose, if you don't set them the trade just keeps running against you!!

My meagre experience has taught me that setting a stop loss level, and remaining on the profitable side of it comes down to good selection of entry level.

For example, regarding the graph you attached. It looks like you use bollinger bands. I would suggest these are hard to use effectively on 5 min charts.... start with 30 min charts, find the trend then work your way down the timescales looking for a suitable entry point.

You may have wanted to go long where you pointed out on your graph because the price had trended down along the bolly line and had broken back up above the lower line. However, your arrow points to a "dragonfly doji", a candlestick pattern which signifies a turning point.... and after 10-15 more upwards points, the DOW duly plunged again. It never crossed the bolly moving average line to confirm a change in direction.

So basically, you picked a bad entry point in that particular case.

But back to stop losses. Ok, let's go back and presume you're now long from where your arrow points to. Ignoring the fact about looking at longer timescales first to check the trend, and assuming you were hoping for the price to bounce off the lower bolly band and hopefully touch the upper one (to close the trade for profit), I personally would have put my stop just under the low of the black candle sitting on the vertical line - around 10,398.

But, on this short timescale I would have been watching closely to maybe scalp a few points or move my stop up if the reversal was strong.

The other advice here is very good, but I would still suggest for you to research more about good entry/exit signals and then enter trades when everything comes together, ie. trending the right way, RSI rising/falling, MA crossovers and good candlestick patterns etc. This may mean you make less trades, but hopefully they will be more profitable.

All the best.