The key is to study Adverse Excursion from each trade and to understand the 'shape' of trades for better stop placement, using arbitrary numbers is practically useless when it comes to smart stop placement.
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I agree with that fully . Firstly , if you are trading the sametimeframe in the same market consistently MAE gives the best clue as to what is and isnt a reasonable stop. Secondly , a trade with a stop thats outside that MAE is probably seeing a turn soon ( wide range bars present ) and should be passed on anyway .
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this is a great thread stops or no stops great answers like many here my take is
you have lets say 10 trades 4 will stops and 6 will go
1)my winners need to be bigger than losers so keeping them the contract longer is require
2)my small profitable experience it is probability with your own system some will make some losses but if you take all signals from a trusted process i come slightly ahead
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often I find its how you define things that can help you clarify in your mind what is then required for the next step.
For example; if you are prepared to have very close stops, then (if your trade setup is supposedly profitable) you will need a way to re-enter quickly. Too often traders take 3 small losses and then dont take the 4th which pays for the day.
Otherwise if the stop is going to be larger then you either need to ensure the potential profit is sufficient to make it worth while, OR the probability of the setup needs to be very high.
If the potential profit is not worth it then its possible the entry is not worth taking, or the stop is in the wrong spot. One way to change your thinking on this is to say something like.... where will I be wrong on this trade, and then find the entry point that is worth while.... too many traders approach it the other way and say here is my entry, now where is my stop.
Additionally, depending on the style, the size of the account and how disciplined you actually can be, the name stop loss could often be misleading - it should be called an "exit to stop the account suffering a devastating blowout" - or a stop blowout. This is less applicable to many traders, but can help visualize what a stop is designed to do. Its not designed to take losses its designed to stop accounts blowing up.
Match what you want to do, what you are trying to do with the actions, not the other way around.
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Thanks - always good to reassess definitions, which is a good reason for these forums......
My understanding is that you used stops (for want of a better word) so that you did not reach the uncle point - or at least in a slower fashion. That is it was the point at which you finally pulled the plug on your portfolio or strategy.
Applying it to each individual trade also makes sense. Basically the point at which you decide you are wrong/ have lost confidence in the trade, and hence should exit the trade.
so can you have a positive Uncle point? - ie; where you exit after a profitable move but have lost confidence in a trade.
Yes, you can manually exit/close the trade with the profit achieved at that moment; you have to be at very close range on your trading platform/chart to read the numbers, and to weigh the balance of your trade. I call this a BAILOUT WITH PROFIT.
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I first hated stops, because I am often stopped out.
Then I tried to ignore the stops and to average down my position thus reducing the price difference between current price and break-even. This worked about 90% of the time, but generated astronomical losses for the remaining 10% of the trades weeping out most of the equity of my first simulation account. I realized that this is gambling, quite similar to a martingale strategy known from roulette. You put your chip on Red. If you lose you double up, then you double again to four chips, etc. If the max. number allowed by the casino is 1000 chips per round, you will probably have 500 consecutive wins of 1 chip each. But in the end - or earlier - there will be a phenomenal loss of 1024 chips, as you will encounter 11 consecutive rounds with a zero or black number. And it will happen!
I do not hate stops now, I know that I should be proud of every stop that I honour, because this will save my account in the longer run. I still have difficulties to develop those positive feelings, but it is necessary. My goal is to watch my stops being hit with a smile. If my setup was valid, I still can reenter. Being stopped out, cleans my mind, as I am no longer married to my position. It breaks the anchoring.
The point is the selection of the setup. It needs to be compatible with the personal profile.
Loss-aversion? If you do not like being stopped out, you only should take with-trend setups.
You do not mind being stopped out twice before putting on a profitbale trade? You are patient and can sit and wait? Then you can choose a lower probability setup with a higher reward-to-risk ratio, which could be a countertrade.
It is critical to select an appropriate level for the stop, which is both compatible with your account (money management stop) and the market (logical stop). The two values need to be reconciled prior to a trade via the position sizing.
A stop is the one of the best tool available to a trader. It is a safety belt, and it enforces discipline. We should be thankful.
Last edited by Fat Tails; August 19th, 2010 at 01:26 PM.
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