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

  #1 (permalink)
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Hard Stop Placement – The Great Contradiction?

Hard Stop Placement – The Great Contradiction?

Will a seasoned trader please…please advise here?

After 3 years of research and full time trading, I remain troubled (by apparently what continues to trouble even seasoned pros I am told).

Here’s the issue: We are told to set a hard stop, for example outside of a price channel or at a support level, etc. as a “hard stop. This is to supposedly allow the trade “enough room” to develop and prevent you from getting stopped out too soon.

YET – we are ALSO told by Pros – NEVER let price hit your hard stop but ‘manage the trade” – and get out sooner – at something far less than the “hard stop”. Again – “NEVER let it hit the stop you just placed at the most recent swing high or closest support level or channel line, or any place else your system "rule" told you to place it.”

So…won’t this result in premature exits? After all, if we never let it hit the hard stop, we are never giving the trade “the room it needs to go through it’s ups and downs”.

What are we to do? Use the “set a stop just outside the price channel” or just above the last most recent swing high” etc etc OR – do something else?

And yes - someone might respond that - it's whatever you are comfortable with...or...you must always manage your trade (of course!)...or there are no hard and fast rules....

The BUT is that there are Pros who make this a hard and fast rule, yet the wisdom of each of these rules are OPPOSITE. Unless I am just missing something.

Any specifics and guidance would be greatly appreciated. Thanks for your time and wisdom.

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  #3 (permalink)
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Let me respond to your question and perhaps we can get some others involved in the discussion.

I'm going to assume you are a discretionary, chart trader. That's what I am and it is the context in which my comments should be understood.

What you call a "hard stop" is what I refer to as a "drop dead stop". This is the price point which, if hit, you are going to get out of the trade no matter what. No wishing, no hoping, no further hanging on, you are out of the trade period. This is one of the critical backstops that provide safety and freedom for your trading. There are a number of benefits to a drop dead stop, but I'll mention just one: You will never blow your account up if you always use (and honor) a drop dead stop. There is no excuse for not honoring a drop dead stop because, if reached, there is nothing left to think about, nothing to debate with yourself, you are out of the trade, period.

A drop dead stop is not the stop you place just below support, or just above a swing high, etc. It is an arbitrary stop that represents the most you are willing to lose on the trade in question. What amount is the most you are willing to lose on the trade in question? It depends. It depends on a lot of things peculiar to your particular style of trading and all of the relevant metrics you compile over time in regard to your trading success. Just one example would be that you might choose to calculate your drop dead stop as a percentage of the value of the stock you are trading, say 1%, or some variation thereof.

As an aside, if a trader is frequently hitting his/her drop dead stop and their account is being drawn down, then that trader has other issues with their strategies/and or methodologies that need to be addressed.

The drop dead stop is your ultimate safety boat, but nobody wants to have to use a safety boat very often. So, in managing your trade you want to be very sensitive to a variety of reference points that may lead you to exit the trade early - well before your drop dead. Also, you may set a much closer mental stop than your drop dead stop, a point at which you plan to exit the trade unless some other considerations lead you to believe that the trade deserves just a little more opportunity to develop.

Best,
Ged

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  #4 (permalink)
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I think Gedman has a good approach here.

I don't really understand the issue Clclcl. Who are these Pros you're talking about? The guys on tv who manage millions of dollars? Who cares you're not them. Maybe the guys who've authored a book but really might not have any practical experience with Live trading? Who cares - wouldn't want to be them.

Or is your issue that you keep getting stopped out before you make your target or the maximum ticks for that trade? If you're focused on making the maximum ticks possible for every trade it'll never work. Be happy with catching 20%-50% of any given move. That's a living.

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Hi clclcl!
Great advice here (Gedman, Moneyhor) that is in line with pretty well everything i have read and more importantly experienced.
When ever i place a hard stop or "drop dead stop" as Gedman mentioned, it is primarily for the purpose of saving my account in case of a very fast unexpected move against my position or a major "event" that causes the mkt to collapse (if long) without giving me time to exit. My (electronically placed) hard stop hardly ever gets hit because i exit well before then.
For what its worth, like MoneyHor mentioned, you are your own person so is best to make it work for you.
This can be quite difficult initially because you want to take advice from proven so called "pros" and follow some rules but i strongly believe what ever it is you are studying you need to "make it your own".
I use the information I glean from books and sites like futures.io (formerly BMT) etc to form a framework for my own trading and weed out or change the things that dont work for me.
For me stops are my safety net and hardly ever get hit but it is one less thing I need to worry about = more mental ram and less emotional stress. IMO, the latter can blow up you account quicker than a mis placed stop.
Feel free anyone to critique the above.
Cheers and good luck!

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Luscord, I certainly agree with you regarding the importance of a trader developing a trading plan that works for himself or herself. While there are general guidelines and concepts in many areas that have near universal application, how and if an individual trader works them into his plan is very personal. It has to do with having an intimate understanding, a 'feel', for what you are doing when trading. Most of us, being built quite distinctive in many ways from others, need to put our personal, foundational trading plan together through intense individual effort, i.e. immersion study and paper trading, followed by live trading when ready. We have to own it, inside and out.

This doesn't mean we can't learn from others. We must. But it is seldom a plug and play process.

Best,
Ged


Last edited by Gedman; February 11th, 2012 at 05:08 PM. Reason: correct misspelling
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clclcl View Post
Hard Stop Placement – The Great Contradiction?

Will a seasoned trader please…please advise here?

After 3 years of research and full time trading, I remain troubled (by apparently what continues to trouble even seasoned pros I am told).

Here’s the issue: We are told to set a hard stop, for example outside of a price channel or at a support level, etc. as a “hard stop. This is to supposedly allow the trade “enough room” to develop and prevent you from getting stopped out too soon.

YET – we are ALSO told by Pros – NEVER let price hit your hard stop but ‘manage the trade” – and get out sooner – at something far less than the “hard stop”. Again – “NEVER let it hit the stop you just placed at the most recent swing high or closest support level or channel line, or any place else your system "rule" told you to place it.”

So…won’t this result in premature exits? After all, if we never let it hit the hard stop, we are never giving the trade “the room it needs to go through it’s ups and downs”.

What are we to do? Use the “set a stop just outside the price channel” or just above the last most recent swing high” etc etc OR – do something else?

And yes - someone might respond that - it's whatever you are comfortable with...or...you must always manage your trade (of course!)...or there are no hard and fast rules....

The BUT is that there are Pros who make this a hard and fast rule, yet the wisdom of each of these rules are OPPOSITE. Unless I am just missing something.

Any specifics and guidance would be greatly appreciated. Thanks for your time and wisdom.

Stop placements depend on what type of trading you're doing. Swing trading will require a big stop while intra-day trading requires a stop that is placed at a point that confirms your trade is invalid. It really depends on what you're looking to do. There's no one answer to your question. In addition to swing or intra-day trading, your stop may vary based on your trading method. BTW, swing high's and low's are just targets for professionals. But there's nothing wrong with being wrong on a trade. Anyone that tells you different doesn't trade for real.

The typical mistake a lot of new traders make is placing a stop that is within their own amount they can only risk vs. what makes sense for the particular market they're trading. Different markets have different volatility which requires different stop criteria. An example would be, a trader can only risk $100 per trade trying to trade CL which is based on their account equity risk while ignoring the market's vol. The market doesn't care about you. It will eat you alive. You may as well just take the money out of your account and have a Rodney Dangerfield night on the town handing out $20 bills to everyone you see. At least that would be more enjoyable than getting destroyed by a thousand stop outs. You need to adhere to the markets volatility that you're trading.

There's no magic number here obviously. Not sure what you're referring to as "pro" but many at a high level don't put a stop sitting in the market because their positions are huge. Could you imagine? Yeah, I'm long 4,000 ES contracts and I'm going to risk 2.50 points and just have that sitting in the order book, lol!

Just study the market you're trading and figure out what makes the most sense. Use a stop amount that confirms you were wrong while not trying to impose your will on the market.

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  #8 (permalink)
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clclcl View Post
...
Here’s the issue: We are told to set a hard stop, for example outside of a price channel or at a support level, etc. as a “hard stop. This is to supposedly allow the trade “enough room” to develop and prevent you from getting stopped out too soon.

YET – we are ALSO told by Pros – NEVER let price hit your hard stop but ‘manage the trade” – and get out sooner – at something far less than the “hard stop”. Again – “NEVER let it hit the stop you just placed at the most recent swing high or closest support level or channel line, or any place else your system "rule" told you to place it.”

So…won’t this result in premature exits? After all, if we never let it hit the hard stop, we are never giving the trade “the room it needs to go through it’s ups and downs”.
...

Stop placement should have nothing to do with giving a trade room to move. If I put my stop at 0, that should be plenty of room to move for any long trade I take, but it's not realistic. A stop loss is the exact point at which the reasoning behind your trade is negated. In other words, the point at which, if the market moves there, the market will prove that your speculation was wrong. It doesn't matter if the market just hits that stop to the tick and turns around and goes straight to your target, frustrating, but your trade idea did not work. Move on to the next trade.

A disaster stop is totally different, it is there to protect your account against unexpected abnormal market behavior or trading event. Your disaster stop should never be hit within the normal market and trading. If a well placed disaster stop is hit, you should be in pain if it is due to an abnormal market event, but then again so will most everyone else in the market. It it is hit because you fell off your trading chair and couldn't get up, then you should be relieved... although you will still probably be in a different kind of pain


Last edited by monpere; February 11th, 2012 at 05:10 PM.
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  #9 (permalink)
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First - a thanks to all for their time and assistance. Generous of all of you.
I hear what you are all saying - the hard vs. other stop distinction, setting at my comfort level, setting where I am proven wrong, etc.
I am or may not be getting it though. one more try - then i will not bother any of you any more....
On my misuse of the term hard stop - got it. Let me get beyond that. My fault for not doing a better job of communicating.



1. Let's say i just use one stop. That stop will never more than I am willing to lose per trade - and that is 2% of my trading account per trade.

2. I also want that stop to keep me in the trade long enough to capture upside moves but keep my losses to an absolute minimum – that is, far LESS than the 2% per trade I am willing to risk.

3. I am told that the point at which I place the trade is where the market proves me wrong. But that point could be immediately when the action goes as little as 2 pips in the red – or even 1 pip for that matter. Right? So – do I exit then? At exactly the instant I am no longer in the black? Even 2 seconds into the trade (I trade on the M5)?

After all – I entered with the intent of making a profit, the market moved against me in these first 2 seconds, I am now down 2 pips – so why not get out right then and there?

4. The answer may be that there will always be noise – that takes my trade into the red over the course of several minutes, but ultimately that noise is shed – and the trade goes in the right direction.

5. So I guess the question is – how do I identify the “noise level” so I can put my stop right outside that noise, not ever letting the trade get close to my 2% loss max per trade, etc.?

6. Is it 1 ATR on average? Is it 2 ATR? Is it at the bottom of the price channel line?

7. I saw a vid of I believe it was Kathy Lien – and she said that after loads of research, they concluded that a stop of 2ATR is always a good rule to follow.

Am I making any sense? Am I missing all of your good points? Thanks again.

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  #10 (permalink)
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Hi,


clclcl View Post
1. Let's say i just use one stop. That stop will never more than I am willing to lose per trade - and that is 2% of my trading account per trade.

2. I also want that stop to keep me in the trade long enough to capture upside moves but keep my losses to an absolute minimum – that is, far LESS than the 2% per trade I am willing to risk.

3. I am told that the point at which I place the trade is where the market proves me wrong. But that point could be immediately when the action goes as little as 2 pips in the red – or even 1 pip for that matter. Right? So – do I exit then? At exactly the instant I am no longer in the black? Even 2 seconds into the trade (I trade on the M5)?

After all – I entered with the intent of making a profit, the market moved against me in these first 2 seconds, I am now down 2 pips – so why not get out right then and there?

When you say "I place the stop where the market proves me wrong", IMO, it shall not mean "I place the stop where I am 2 pips in the red". It shall rather mean "I place the stop at a level which, if reached, proves that my reasoning to enter the trade was wrong".

For instance, let's suppose that, for a given reason, you enter LONG because you think that an uptrend is on-going. An up-trend is typically composed of Higher Highs (HH) and Higher Lows (HL). You may choose to place your stop a little below the most recent HL. Why? Because, if the price goes to that level, the chain HH-HL-HH-HL-... is broken, and this is not any more an uptrend (when using the above definition).

Of course, what I have just written is over-simplified, and I do not advise that you proceed like that each time. It is just an example.

I do not understand the combination of your items 1 and 2. If you are "ready" to lose 2% of your capital per trade, you could place the stop according to the price action as described above, then adjust the size of the position in order not to risk more than 2% of your capital:
(entry price - stop loss) * size of the position = 2% of the capital

In this case, it obviously means that, if the stop is hit, you lose 2% of your capital.

Nicolas

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