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STOPS are Frustrating (SL) ...to take or not to take
Let's agree to disagree on that one. I believe the answer is crystal clear. You cannot be a *long term* profitable trader without stops. You can make fabulous gains short and even medium term, if you are lucky(and or SKILLED), but sooner or later, you will get schooled by the market.
Stops give you an opportunity to GET OUT, take time, clear your head, assess the market and decide where to go from there. You were wrong(or maybe not), who cares? You lost a little equity, still plenty left...
The market isn't necessarily going to do any one thing or the other except continue to move, so why sit in a bad trade, waiting, hoping, praying, AGONIZING that it reverses before margin call. It's bad for your health(and those around you) and it ensures that you are making poor trading decisions. Trading(poorly) that way took away my ability to LIVE and interact with others in the way that they deserve to be treated.
Stops are YOUR FRIEND! Just like the trend...
You are also at a sheer disadvantage if you believe the markets are random.
DarkPool, I completely agree with you about the effect not having a stop has on your psychological disposition.
None of us like getting stopped out - we know that no setup has a 100% success probability and therefore we are bound to get stopped out sometimes but just didn't want it to be this time. But at least having been stopped out the attachment to the trade is broken and we can step back, take some time out if necessary, and then reassess the market before entering the next trade.
I guess anybody who is trading without using a stop will not learn their lesson until they have lost a sum of money which is very significant to them. A long time ago I was there myself and I learned my lesson the hard way. And DarkPool is right in saying this will cause problems both to yourself and by extension those you live with. Unfortunately the expensive way seems to be the most common way of learning this lesson - I wish for others' sake it were otherwise.
Personally I favour MAE-based stops (see prior posts by LukeGeniol in this thread).
A word on stop positioning, no matter WHERE you place your stop there will ALWAYS be an occasion when you get stopped out to the tick and then the market reverses and runs a long, long way in the direction of your original trade. I stop trading and take the rest of the day off when this happens.
What you wrote described my experience exactly. I've actually been having that same problem my entire trading career. I tried every method you had tried as well. Like you said, seem like someone was looking over my shoulder constantly too.
So I wanted to answer these questions too, cause I was baffled as well. And atleast for me, it came down to have never really given much thought to a good entry in the first place. It is so easy to look at a chart at night and say " well someone in here is where I'll go long. " But then when the thing is moving, and your emotions are on the line, not to mention you "soul" your MONEY, things are different.
So for me I fixed it and recently too, real recently! For myself it came down to knowing exactly what would happen from start to finish when I bought or sold. I had way to much discretion in my executions. So thats my experience. Thanks for the thread, good one.
Stops suffer from the same problem of duality as does leverage. Used properly it is an indispensable tool, but used improperly it will inhibit or destroy your P&L. Improperly placed stops will not only limit your risk, but will also limit your opportunity. Fixed price-based stops and trailing stops can seriously degrade your performance, and cause a slow but certain death. Failure to use stops can of course, result in sudden and certain death.
Simply because a market moves against a position does not necessarily mean that the underlying trade idea is invalid. The important thing is to know your trade idea and what would truly invalidate it. In other words trade the market and not your P&L, and to try base your stop on where you are wrong the market.
If you are uncertain where the “ I’m wrong the market “ price is, then base your stop on sound money management principles. To do the job properly:
• Determine how much you are willing
to risk on each trade.
• Understand the risk of the trade you
are about to take and size the trade
appropriately.
• Track the trade going forward.
• Pay attention to your risk points;
take small losses before they become big
losses, but allow the price action to dictate your actions
Proper money management begins with proper position sizing which will inevitably aid you in your stop placement.
I agree with tiger and want to add one thing. Just because you only wish to risk "20 ticks" -- meaning you can only afford a 20 tick stop -- doesn't mean that makes any sense at all to put into the market. If your risk management tells you that 20 ticks is the max, then you can't just throw an order into the market with a 20 tick stop.
You need to set a stop at a logical level based on market price action. It's the point where your original premise on the idea is now incorrect. You thought market was going down --- you set a stop where you now no longer think that is the case. If that stop, determined by market price action, volatility, etc etc is wider than your maximum risk exposure (ie 20 ticks), then you cannot take the trade. You can continue to watch and the market may come to you a bit where you can place the trade within your risk tolerance AND at a logical level for the market to follow, if the trade is still valid at that time.
I agree with you 110%, but the target needs to be equal to the risk level, lets say that your account size is large enough that with risking 2% per trade that you can risk 40 ticks or more that in order to keep the r/r at 1/1 or 2/1 your target needs to be equal to the risk level. What I'm saying is even if my account is large enough to take a such a large risk exposure I think I would prefer to wait for a setup with less risk exposure.
Lots of good comments on stops here .... as has been mentioned, I think the most important thing most people can do is focus on selectivity with the entries. That's going to be really tough to do if you are micro scalping -- good luck -- but easier to do if you are only looking for 3-4 entries per day, or less and, maybe easier still if you are willing to hold overnight and go multiple days with a position that doesn't go your way immediately (instant gratification society), using futures contracts to protect against overnight disaster with stops that would at least give you a shot at getting out before limit down.
Be very very selective with the entries -- you need to let more trades go by than you'd like --, use conservative position sizing that doesn't force you to place stops too tightly, and then use a fairly loose stop that is unlikely to get hit.
Thousands of cuts are more dangerous than the occasional bigger -- but not too big -- loss.
The better your entry, the easier it will be to place your stop properly.
If you are going dance with the market, you want the market to lead. Wait for buyers/sellers to make their move and show their hand before you enter the market. That doesn't mean you chase highs and lows; rather you buy/sell the first pullback from an initial push as your entry. And you always buy weakness in a strong market, and sell strength in a weak market. If you're patient and wait for that first thrust that kicks off a trending move, you have a natural stop loss point: if market participants are truly rejecting price at the start of that move, you shouldn't see that price again.
The key to making this execution approach work is being patient enough when you're a buyer to let sellers "take their turn", and when you're a seller to have the patience to wait out the buyers' next bounce. You want to see those sellers and buyers get trapped on the next leg of the trend so their exits will help your position.
However, it maybe just as important to emphasize the exit.
Knowing the odds of hitting your target price is an important part of the equation. If the probability is low for reaching your benchmark price, and the risk/ reward does not present a favorable opportunity, then you do not need to make the trade. Once again, the stop loss level is not defined as much by how much you are willing to lose, rather than at what point are the odds no longer in your favor for being right the market.
That being said...
Money management should be asymmetric.
Accuracy - Patience to wait for good entries, means you are probably going to have more winners than losers, although it's more about timing and tilting the odds in your favor, than winning percentage.
Execution - Winners are going to be substantially greater than your losses. Now that winning percentage takes on even less significance.
Sizing - Adding to your winners as the trade is working... add to your size when you're right and keep size small when you are not. The frequency of being right does not matter; it's the degree to which you are right that matters. Winning percentage is now rendered totally insignificant.
My fade trades have very tight stops below areas of low supply seen in the market profile (long positions - vice versa - low demand areas for short positions)
My breakout trades above/below market value (seen in the Point of Control) utilize a wider
stop as I anticipate more accumulation/distribution in which case price can run up
and down (before the breakout) more so than a fade trade.
I predominately trade Oil Futures, but I use the same method in all futures trades.
