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Strategically Placing A Stop
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Strategically Placing A Stop

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Strategically Placing A Stop

I am having trouble determining where to place my stop. I always hear to place the stop strategically based on the chart but what does this mean? I also have seen some traders move their stops as the trade is in progress. Does anyone have any feedback?

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  #3 (permalink)
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Do you speak about your stop lose or your target?

If it is for a target no one than you can answer the question because it is based on the system that you trade.

If it is for a stop lose IMO the stop lose is like an airbag in your car. Your happy to have one, in fact your are obliged to have one, but you need to do everything you can to avoid using it.

Where to place it is IMO also obvious it is what you can afford to lose based on your equity, the rentability of your strategy, the w/l ratio of your strategy etc... I think that a stop lose has nothing strategic at all it is just mathematical. After having done the calculations on the above ratio and stats of your strategy you should be able to end with a value in $ or ticks. After entering a trade you can decide that at some point of potential profit you want to play with the market money and you can manually move it higher (some people like to have it trailing, I don't but because the stop become now a kind of target but it is very personal).

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vitrader View Post
I am having trouble determining where to place my stop. I always hear to place the stop strategically based on the chart but what does this mean? I also have seen some traders move their stops as the trade is in progress. Does anyone have any feedback?

As I understand the topic it all can be summarized in the concept of position sizing.
  1. Perceive an edge
  2. Define the risk
  3. Take the Trade
  4. Perceive an edge
  5. Define the risk
  6. Take the trade

Over and over....

So defining the risk or stop placement in this case (options is another way) should IMHO all be based off criteria set up ahead of time in your trade plan. Namely how much you are will to risk (say good bye to) per trade usually based on a % of account size. Generally safe trading would mean risking 1% per trade. If one has $100k for trading then this would be $1000 risk per trade, for example. So based off of something like this now you need to look at the market for support and resistance areas to place your stop around. I understand many will do all this differently this is me and a larger acct. But I feel solid info, a starting off place so to speak. Let just take ES for this example. Say you perceive an edge for a long and the best place to call the trade no longer working is at support 3.5 points away, 14 ticks or $175 on a 1 lot. But we risk $1000 per the trade plan. So we can, on this trade, trade a 1000/175=~5.7 or a 5 lot. Risking 175*5=$875 with a little room ($125) to scale in at a few diff prices if we don't get a fill or what have you. IMHO this all gets harder with smaller accounts. Markets need room to wiggle around.

IMHO look for areas perhaps (I say perhaps because every moment in the market is completely independent of all past moments) that had a good strong reaction once before and in your best judgement has a high probability traders will defend their position again there. There is zero substitute for screen time, years of it. I'll never forget I was on the phone with IB, I think it was, because I was having some issue (I did yet another dumb and the NY tick was just hammering negative and the Flash Crash happened right before my eyes. I saw the DOW down over 700 in about 2 seconds it was nuts. May 6th 2010 I was in the kitchen on the phone with a laptop.

Hope this help some....


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vitrader View Post
I am having trouble determining where to place my stop. I always hear to place the stop strategically based on the chart but what does this mean? I also have seen some traders move their stops as the trade is in progress. Does anyone have any feedback?

There are several ways in which to determine a stop. Couple I can think of are:
  1. Volatility based, i.e. determine your stop as a function of ATR. This approach was used by the Turtles.
  2. Fixed move based, i.e. if a trade move 5 points (or perhaps a fixed %) against me. This is the approach used by William O'Neil in that he advocates a 8% stop loss on stocks.
  3. Chart based, i.e. place a stop under the current consolidation or support if you are trading long. This is most likely what is meant by a strategically placed stop.
Once you have decided on which method you wish to employ, you should then review the post made by @Blash to determine the position size based on your planned risk per trade.

With regards to moving a stop, all I can say is that it has its pros and cons. If you trail your stop too tightly, you may find that you get stopped out 3 times in a row whereas if you just kept your original stop the trade may have been a winner. You may also find that had you trailed your stop closely then on a winning trade you could have made a decent profit, rather than ending up with a breakeven trade. There is no right / wrong answer, all you can do is adopt an approach you are comfortable with.

Last edited by grausch; March 18th, 2016 at 05:19 AM.
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