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Hard Stop Placement – The Great Contradiction?
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Hard Stop Placement – The Great Contradiction?

  #21 (permalink)
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STOP ROOKIE.

I am a rookie and most of the lessons that I have learned the hard way are related to stops.
Some of the lessons learned were the result of my bravado (ignorance).
Some were actually the result of following my rules. (discipline)
Now I am learning to manage fear and desire (psychology)

FIrst live trade ever. 9:30 a.m. opening bell. market moves up. I click BUY (market). 1 contract. ES. Naked. No stops. ...Or so I thought....
In mere seconds I see profits rise to $62.50 then back to $50. I exit. $38.50 profit minus brokers fee.
"WOW! I am going to be good at this" My adrenailine is pupming. Must have cigarrette.
GO outside. Smoke. Come back..."Whats this?? I am in a trade!?!? (didn't realize my platform had preset stops and the stop became a working order after i sold out of my long)
Luckily I am now up $100. Good ,but..."I'm not supposed to be in this trade!" Cancel. EXit. Get me out!
"WOW, I can do this."5 minutes of trading and I am up $100 dollars!
Leave my proverbial desk to go run errands. Return home. 2pm. Yellen speaks. Market rises. Once again, I break my initial rules. CLick BUY. (Market). Now up $185. "Yay!! I am awesome. I am going to quit my job. I should turn off my machine for the day!!(Take what the market gave me)" NOPE. I jumped back in. No set stops. Market reverses with a fury. I am using mental stops. I have a small account. THe pain is too much. I exit down $185 for the day. All this happens in a couple of minutes. "WTF!!"
Lesson for small account trader.....Thats me. Use stops you big dummy. The market has the potential to move faster than you can make descisions!

Lesson 2. Today I will recover my losses. Mmmm HMMMM...
Non farm payroll. 8:30am EST. Market rises sharply. CLick BUY Order is filled a second later but 8 points above intended entry. watch profits flash to $125 and then down to -$200. All of this in seconds. Lesson learned. Don't place market orders immediatley after a news release and USE STOPS! Especaillly with a small account!! Note: While sitting there scratching my head wondering WTF I watched the market move back in to what would have been profitable territory had i stayed in the trade. Salt on the wound.

Now these 2 days were complete rookie mistakes. But the thing is , I knew not to violate these rules. I read them. I took notes on them. THey were in my lists of rules. I had read a lot about managing risk. THe 2% rule. The 5% rule, always use STOPS. Guess all those lessons didn't register. Needed a wallop against my head to realize them.

I began to set my stops at 2%.
Result: Getting stopped out of trades that would have been good trades except for my shallow STOP LOSS.
Lesson Learned: If using shallow stops. Precise entry is crucial. Also in a fast moving market, like those after news releases, a STOP LIMIT can get jumped and a STOP MARKET can result in massive sllipage exceeding ones determined risk.

SO while I have learned lessons about using stops, and the need for precsicion while trading a small account, my new endeavor is getting a hold of my emotions and not being afraid to get back in after being stopped out when my initial idea turns out to be correct. But that is for another thread....

While I submit this for the experienced to laugh and reminence at (but I don't mind because in retro spect I think its funny also! LESSON: Don't be attached to my convictions when trading, accept that sometimes I will be wrong. My preset stop losses will determine this so i don't have to. And be able to laugh at my own follies) I also submit it for the rookies to learn from. Risk management is vital and STOPS are a huge part of RISk management.

Luckily I have not blown up my account...YET!I have been sitting on the sidelines and watching more than not..... I take the occasional scalp. I occasionally win and I occasionally lose. But most importantly I take trades at times when the risk of stop jumping and slippage is low and I always use preset stops. I intend to start a jounal on this forum whence I began to actively trade again so that I can be critiqued, and when warranted, lambasted, and get the occasional pat on the cyber back from the many seasoned and highly intelligent entities on this forum. ( Seriously, SOmetimes I have no idea what they are talking about LOL. Just goes right over my head) But seriously, THis forum is awesome. Reading the members journals and experiences have been invaluable to my learning! Thanks BM's!!

Last rule: THE MARKET WILL ALWAYS BE THERE. IF you don't believe that, your trading account will not.

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  #22 (permalink)
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Silvester17 View Post
the flash crash is a good example when a stop loss order can do more damage than protection. if you had an "emergency" stop during the flash crash, it's very likely you got filled at or close to the bottom. and then you had to witness how the market recovered without you.

it's important to see the disadvantage as well

btw this is based on a stop loss order and not a stop limit order

This is true and very important.

It's crucial to understand that a "disaster" or "emergency" stop will not always save you in a true emergency. Also, while a market stop loss would have acted exactly as described, a stop limit might not have gotten filled (probably would not -- who was buying?), and if the market had not bounced back as it did in the flash crash, it might not have helped you either.

Emergency stops are protection for "normal" emergencies, not true emergencies....

Is there a protection for true emergencies? Sure: don't be in the market when they happen. Oh, wait....

Bob.

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  #23 (permalink)
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bobwest View Post
This is true and very important.

It's crucial to understand that a "disaster" or "emergency" stop will not always save you in a true emergency. Also, while a market stop loss would have acted exactly as described, a stop limit might not have gotten filled (probably would not -- who was buying?), and if the market had not bounced back as it did in the flash crash, it might not have helped you either.

Emergency stops are protection for "normal" emergencies, not true emergencies....

Is there a protection for true emergencies? Sure: don't be in the market when they happen. Oh, wait....

Bob.

yes, exactly

and now we can take it a step further. you don't use a stop loss. you just want to exit your long trade by using the "close or flat" button. with other words sell at the market. unfortunately the result would be probably very similar. again filled at or close to the bottom.

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  #24 (permalink)
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Silvester17 View Post
yes, exactly

and now we can take it a step further. you don't use a stop loss. you just want to exit your long trade by using the "close or flat" button. with other words sell at the market. unfortunately the result would be probably very similar. again filled at or close to the bottom.

In the flash crash, or, in my opinion, in any other true emergency, there really was not anything you could have done, or could do.

Liquidity was almost nonexistent for the crash and the subsequent bounce. I remember frantically trying to get a fill on some index puts when I saw it starting, thinking I would clean up on the decline. I got a fill, all right, but it was during the big bounce up after the drop. During the entire decline I couldn't even get a quote. As the indices kept going up I was trapped in the puts, now frantically trying to sell them. Eventually, at a good loss, I did.

Nothing will work in a normal manner in a true emergency.

"Disaster" stops or "emergency" stops are for routine disasters, little drops caused by a bad report or something, not big ones....

Bob.

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  #25 (permalink)
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Personally... I do believe in an Armageddon stop for the ES. You want something in place just in case something unexpected happens somewhere in the world.

How far away should it be? Depends upon volatility. Keep it outside the 0.01% near term probability area.

Also... The Flash crash wasn't all that hard to avoid. I was actually trading long side toward gap fill that morning, but a downtrend started to establish toward noon so I wasn't long into that event. It was a slow start to the downtrend after near gap fill, then it steadily accelerated lower faster and faster.

The funny part about October 15th was it raised the hair on the back of my neck because it was pretty much the same pattern as the Flash Crash.

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  #26 (permalink)
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I think I am better off most of the time having a hard stop, if you want to get back into the trade, there's always another chance

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  #27 (permalink)
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I never use resting/hard stop loss orders.

I have different strategies that use different stop loss methods

For mean reversion trades I check indicators or price levels for stops but only check and execute the stops after the bar closes. This prevents me from getting out of trades that initially go against me and would have been stopped out if I had used a resting stop later but later turn around for a winner, but I also sometimes exit much deeper of a loss than I had hoped for.

For momentum trades I mainly use trailing stops, sometimes I'll sell a portion at a certain "house money" level.

For discretionary swing trades sometimes I use options to hedge my losses, either on a correlated pair, buy an outright put if I'm long or call if I'm short, or I'll collar the trade to minimize my downside while minimizing my upside, but at $0 cost.

Pick your poison, whatever works best for you. I backtest different stop methods for each strategy to find which one works best.

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  #28 (permalink)
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shodson View Post
I never use resting/hard stop loss orders.

I have different strategies that use different stop loss methods

For mean reversion trades I check indicators or price levels for stops but only check and execute the stops after the bar closes. This prevents me from getting out of trades that initially go against me and would have been stopped out if I had used a resting stop later but later turn around for a winner, but I also sometimes exit much deeper of a loss than I had hoped for.

I used to do that because it seemed like a lot of my trades were reversing just under my stops. I came up with a rule that I would act only after the price closed below where my stop was calculated. Then I would place a hard stop below the low of that price bar. Every so often a trade would get away on me resulting in a much bigger loss than I had planned. In the long run that rule was going to cost me money.

I did a review of all my trades and found it would have been to my advantage to take the stops. The numbers showed that I lost more letting my trades go past my stops than I would have if I had used hard stops.

My thinking now is that the stop is placed at a point where if it traded there, the trade would be invalid. If it hits that price I should be out. I enter trades with a bracket order and only move my stop in the direction of the trade. It also causes less stress as I don’t have to make a decision if price exceeded my calculated stop.

It is hard to find the Truth when you start your search with a preconceived notion of what the Truth will be.
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  #29 (permalink)
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deaddog View Post
I used to do that because it seemed like a lot of my trades were reversing just under my stops. I came up with a rule that I would act only after the price closed below where my stop was calculated. Then I would place a hard stop below the low of that price bar. Every so often a trade would get away on me resulting in a much bigger loss than I had planned. In the long run that rule was going to cost me money.

I did a review of all my trades and found it would have been to my advantage to take the stops. The numbers showed that I lost more letting my trades go past my stops than I would have if I had used hard stops.

My thinking now is that the stop is placed at a point where if it traded there, the trade would be invalid. If it hits that price I should be out. I enter trades with a bracket order and only move my stop in the direction of the trade. It also causes less stress as I don’t have to make a decision if price exceeded my calculated stop.

Yeah, you definitely have to test which type of stop will work best for you. I trade on larger timeframes (1hr to 1day time frames, depending on strategy and instrument) so I don't "stress" too much because I don't look at them all day and my risk on each trade is a very small percentage of my account (less than 1%).

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  #30 (permalink)
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shodson View Post
I trade on larger timeframes (1hr to 1day time frames, depending on strategy and instrument) so I don't "stress" too much because I don't look at them all day and my risk on each trade is a very small percentage of my account (less than 1%).

Likewise: I swing trade stocks. If I have a day trade it's because I'm wrong about the direction and I've been stopped out.

I take my losses as planned then can re-assess and get back in if the criteria are favorable.

Here's a chart I posted in a different thread that shows why I place hard stops.

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It is hard to find the Truth when you start your search with a preconceived notion of what the Truth will be.
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