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Executing mental stop loss - Strategies / Rules
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Executing mental stop loss - Strategies / Rules

  #1 (permalink)
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Executing mental stop loss - Strategies / Rules

I trade CL live intra-day and sometime carry the position overnight. I am not a scalper and target 30-40 ticks for each trade.
After several trial and error and learning and un-learning - For CL having hard stop does not work well for me / my method.
Recently i have adopted a mental stop method and some rules on when / how to exit when stop condition met.
Here are few.

1) Once a level is breached and price stayed above /below the level for 15 mins, my mental stop is triggered. Now my goal is to exit this position with as minimal loss as possible.
Few examples of my manual stop exit rules:
-Exit when price retrace back to 20EMA @ 5 minute chart
-Exit when price retrace back to VWAP or POC
-Exit at 50% retrace of the current swing.
2) If i carry over losing position overnight,
- Exit when price retrace back to 20EMA @ 1 hour chart on the following day


These rules seem to work out okay for trading range days and mild trend days.
But i get screwed on a run away trend day. Some of these run away trend days do not give an option to exit at favorable price at all.

I know several experienced traders use mental stop rather than hard stops.
What rules do you have to get you out of losing position on a trend day.
My rules do not work at all on strong trend days and i end up closing the position at PIT close for potentially huge loss.

Waiting for your guidance and i appreciate your help.


Last edited by kavi15; November 3rd, 2017 at 05:16 PM.
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  #3 (permalink)
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Personally I've had to force myself to make a real critical evaluation of where the stop needs to be, enter the stop when my entry gets filled, and walk away... It's all part of having a plan for your trade. Almost anything else led to rationalization and poor decisions personally. Also like you said, once your mental stop is hit you don't always get the opportunity to exit nearby.

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  #4 (permalink)
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Good question. I'm trading BTC which likes to run hard both ways. I'm trading it very small though. As you noted, one solution is to look for mean reversion and trend in the same context. You wait until you establish a low or high and that can be your stop. A time based stop is often useful to avoid closing at low or high. However, any sort of time or mental stop runs the risk of getting run over (punned). One option is to add to your losing trade at the point where you think its going to break or make then if it doesn't you have a solid confirmation that you were completely wrong and then you cut it immediately.

The market tends to target optimal stop losses. The one option is just to set your stop loss something larger then optimal. Of course, this assumes you don't adjust due to knowledge you will have to adjust.

Reality is: your stop loss is your pain point or liquidation point. What traders mean when they refer to mental stop is they are either tape reading or they are looking at market structure to weight the probability of a trade working out. As you noted, in noisy markets this can work well. However, in markets that run there is often not time to make a rational decision. The other solution is to be more selective in your entry.

In general, mean reversion trades need larger stops while momentum trades might work with tighter stops. This would be true if you find your market tends to switch between serial correlations. A mental stop is no use if you are (1) not able to respond in time or (2) not watching the market or (3) likely to act on emotion or fear. That's why I like the idea of something quantified being established.

I don't think you will find much help with crude oil. But, if you can find something correlated to take opposite trades in then you can reduce your risk or you might look at placing an options spread or buying a put. Stops are difficult to make work. You might look at some sort of spreads. I think whatever you do you're probably better to make it something you can execute consistently, i.e. make it something quantified.

If your still struggling, you probably need to become more selective in your trades and/or refine your methods. I want to avoid taking huge losses. The only way to do that is to take a smaller guaranteed loss.

At my blog, I describe the concept of "gray boxes" which is basically how you might combine some quantitative strategy with discretionary elements. In your case, what you might do is once a trade goes out of bounds, you might hand it off to your quantitative strategy which will dictate precisely what you do. This would be a backtested or simulated strategy that given a variety of random or other entry signals can choose a best exit plan. Basically, you are automating the exit strategy only.

The short story is: you cannot rely on any of those other measures to always work. A smart trader will try to come up with the optimal but the stop loss is often the cheapest way to take a loss.


Last edited by tpredictor; November 3rd, 2017 at 09:16 PM.
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Like you have experienced yourself, everything would work some of the time. I can offer you my guidance on stops, but I feel you may have to approach trading from a probabilistic perspective.

Picking something rational, using it universally and trying to optimizing it, although is logical would be a frustrating endeavor in trading. The other way to approach this is based on your reading of price movement, you could judge if it is a ranging day or weak trend or strong trend day and then use a stop suitable for each of those types of days. Do this over a number of trades for each type of day and see if you are having a positive expectancy. You can always get better at reading price and improve in determining what type of a day is unfolding in front of you. That will become your true edge.

In terms of guidance, if I feel the day is trading, I would use a stop beyond the most recent swing low or high, scalping a portion (1x reward) and swinging the rest (2 to 4x reward). If the day is ranging, I would scalp out the entire portion (1x reward), entries usually being fades at levels with stops a few ticks beyond the level. Doesn't have to be complicated. What's important is consistency in execution and letting probability play out. And, always have a catastrophic hard stop even if you use mental stops...thats my 2 cents.

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I thought I'd share a method I like to use. You take your stop loss but you re-enter the trade if you can recognize a stop run. So, you're keeping track of memory of both yours and other traders positions. This can work well. Obviously, if you can avoid the stop loss you stand to make more but you take more risk. If you use the small stop, you may miss out on some gains. So, it is more of a balanced approach. The small losses can add up though (whipsaws) so I will limit it to usually only one or two re-entries.

What I say to myself is I said I can predict the market, if I am reading/predicting the market well then my prediction should be sound. If it is not then I have either a poor entry or I'm not reading the market well or I overstated, to myself/the market, my abilities.

A lot of my best market cognition ideas come from tracking markets over time, learning to recognize the entire field and then only trading when my read is strong.

The other thing you can do if you want to trade more often is to balance your orders based on your confidence. So, let's imagine you're not very confident then you'll shade your entry. The other thing you can try to do is exit before the market starts to really run against you, so you can get a better fill. That will require placing the stop within the most recent range though-- which will lower your winning percentage.

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Let's think about this a bit...

To the OP:

I use a mental stop but also set a hard stop in the market. For instance on my trades I'll have a 5-6 tick emergency stop and maybe a mental stop around 2-3 ticks. My emergency stop is in case some asteroid hits the earth while I'm in a trade and I'm on the wrong side, it will just take me out, but my emergency stop should never be hit because I don't have the discipline to execute my mental stop. So in a way, it's a safety net against long tail events and myself.

I also don't fade trend days. If there is strong and relentless buying why the hell would you step in front of that and fade it? If you do not know what a trend day looks like, then I highly recommend you pull up some market replay and observe the price action on the DOM (like Jigsaw or TT), how the bid/ask react as there are takers, the liquidity of the levels, and the aggressiveness of those in control on these days. If you don't fully understand why a trend day is a trend day, then no stop loss can help you and you have bigger problems.

In trading, shortcuts lead to the longest path possible.
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Make it binary imo , take the emotion out of it . Mental stops generally makes it emotional cognitively , subconciously i should have held or i shouldnt have stopped does no good . IF you use mental stops and dont have a solid plan document the results and analyze . Truth is evidence you cant argue with . Who actually follows their mental stops ? Do you just hang on that bit longer ? Do you only stop when the pain becomes unbearable ? Ask yourself these questions and i'd suggest hard stops win everytime . Make it mechanical imo

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An Algo Trader's Perspective

I believe in having hard stops because as an algo trader I have to program something in my code and live with it. You can't just run an automated strategy with no worse case scenario exit, that would be crazy. Given this fact, I have designed different sized PTs / SLs for different market conditions. This is the key part that I believe most people are missing. If someone just throws out a number... 27 ticks, for example, and says: "27 ticks is my stop loss in all cases." I would ask that person why they picked that number. After this person tried to explain it, the reasoning would ultimately come down to some arbitrary explanation with very little evidence to support why they picked that number. This is a common behavior I see from most discretionary traders. You need to create hard rules to trade with and you need to be able to understand why you have these in the first place.

Here is a helpful tip. If the market is really moving, you can have a tighter SL and a higher PT and the probability of hitting either will start to become more even because if the market is moving up and down in 10-20 tick moves then hitting a 5 tick or 15 tick move become equally as likely. Now conversely, if the market is frozen in low volatility, then the odds of catching 2 or 3 ticks becomes 20 times as likely as catching a 10 or 20 tick move. So this is why you can not ever just set a static SL and assume it will work every day in every case. Or even worse abandon any type of rule altogether and just roll the dice.

Good Luck!

Ian

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iantg View Post
I believe in having hard stops because as an algo trader I have to program something in my code and live with it. You can't just run an automated strategy with no worse case scenario exit, that would be crazy. Given this fact, I have designed different sized PTs / SLs for different market conditions. This is the key part that I believe most people are missing. If someone just throws out a number... 27 ticks, for example, and says: "27 ticks is my stop loss in all cases." I would ask that person why they picked that number. After this person tried to explain it, the reasoning would ultimately come down to some arbitrary explanation with very little evidence to support why they picked that number. This is a common behavior I see from most discretionary traders. You need to create hard rules to trade with and you need to be able to understand why you have these in the first place.

Here is a helpful tip. If the market is really moving, you can have a tighter SL and a higher PT and the probability of hitting either will start to become more even because if the market is moving up and down in 10-20 tick moves then hitting a 5 tick or 15 tick move become equally as likely. Now conversely, if the market is frozen in low volatility, then the odds of catching 2 or 3 ticks becomes 20 times as likely as catching a 10 or 20 tick move. So this is why you can not ever just set a static SL and assume it will work every day in every case. Or even worse abandon any type of rule altogether and just roll the dice.

Good Luck!

Ian

Spoton SL should be strategic at a point where analysis is wrong , the last thing you need is to stop where you would normally enter . Many type of mechanical stops out there . ATR based , recent swing highs/lows , range based , time based etc etc . EXPLORE !!

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