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Do you get stopped out too often?
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Do you get stopped out too often?

  #1 (permalink)
Market Wizard
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Do you get stopped out too often?

If you do get stopped out too often, despite the fact that you have correctly identified the S/R levels for placing your stops, perhaps your stops are too close to these levels. Most books and self-proclaimed GURUs out there will tell you to place your stops 1-2 ticks above or below these levels. Well, there are professional traders out there that read, know, and preach the same stuff and are ready to take your money; they are stop-hunters.

When placing stops one needs to think like a hunter and try not to fall in their traps. Kind of like playing reverse psychology, expecting what the hunter will think of your stops. These guys are equipped with staying power, muscles, advance computers and gps systems to track stops. So, what a trader can do is to avoid and evade them by not providing them with low hanging fruit to pick or placing a 1-2 tick stop and play dead. After all, they are known to be worst than Grizzlies (they will eat your babies too).

So, instead of confrontation with the Beast, the easiest way for a trader is to place stops at least 3-5 ticks away from the S/R levels. It is like climbing a tree in Serengeti where the Cheetahs and Hyenas can not reach you (But beware of Leopards and Vultures!)

Happy Trading!

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  #3 (permalink)
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A stop is two things for me:

1) Disaster. Something happens, and I need to be taken out of the market.

2) I am wrong. If price trades at this price, I was wrong about the trade.

Do you think changing from 2 ticks to 6 ticks disqualifies the entire trade? If the market trades 7 ticks out of that S/R levels, is the entire trade incorrect? If you picked short, is short no longer the correct direction?

My suggestion is that anyone that trades this way is likely trading way too big (size). The better thing to do would be to decrease position risk by trading a smaller instrument (micro, spot forex, etf, etc) and then increasing their chart and their stops and targets.

I for one do not measure being wrong or right in ticks. If a daily range is 20 points, I would measure being wrong at say 10 points or so.

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  #4 (permalink)
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Big Mike View Post
A stop is two things for me:

1) Disaster. Something happens, and I need to be taken out of the market.

2) I am wrong. If price trades at this price, I was wrong about the trade.

Do you think changing from 2 ticks to 6 ticks disqualifies the entire trade? If the market trades 7 ticks out of that S/R levels, is the entire trade incorrect? If you picked short, is short no longer the correct direction?

My suggestion is that anyone that trades this way is likely trading way too big (size). The better thing to do would be to decrease position risk by trading a smaller instrument (micro, spot forex, etf, etc) and then increasing their chart and their stops and targets.

I for one do not measure being wrong or right in ticks. If a daily range is 20 points, I would measure being wrong at say 10 points or so.

Mike

Agree. Stops are for disaster and being wrong, your points 1 and 2. The rest depends on the market, time frame, and risk one uses to trade. I will never use 5 ticks stop for day trading ZB. For popular instruments like ES, CL, NQ, 6E 1or 2 ticks stops will have negative impact on your system performance (daytrading 5-20 ticks targets) compared to 3-5 tick stops.

Here is a test one can do either back testing or forward testing. Pick a simple system like CCI Pivot indicator (5M) firing off buy and sell signals when crossing the 100 line. Run four tests simultaneously with 1, 2, 3, 5 tick stops and pick a target from 5 to 20 ticks (this will give R/R of 1-4) for at least 100 trades. Then see the results.

I did this study a few years back and for sure 1 and 2 ticks stops gave the worst results. I will post them if I can extract them from my old dusting computer.

As far as qualifying or disqualifying a trade, as you mentioned the purpose of stops are simply those in your items 1 and 2. One assumes that his trade may not be qualified and thus uses stops. A trade without a stop can be considered qualified as long as you hold on to it, and will most likely be profitable eventually.

fwiw, I have a small Forex account for the sole purpose of forward testing trading micros. I do not use stops there but I use targets for carry trades. I have yet to have a loosing trade. What goes down will eventually come back. I have made a killing (relatively speaking for the size of the account) trading AUD/USD and collecting the interest difference also. I could not duplicate this performance trading full sizes without stops unless I have a huge bankroll.

Cheers!


Last edited by aligator; February 1st, 2012 at 01:46 PM.
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aligator View Post
If you do get stopped out too often, despite the fact that you have correctly identified the S/R levels for placing your stops, perhaps your stops are too close to these levels. Most books and self-proclaimed GURUs out there will tell you to place your stops 1-2 ticks above or below these levels. Well, there are professional traders out there that read, know, and preach the same stuff and are ready to take your money; they are stop-hunters.

When placing stops one needs to think like a hunter and try not to fall in their traps. Kind of like playing reverse psychology, expecting what the hunter will think of your stops. These guys are equipped with staying power, muscles, advance computers and gps systems to track stops. So, what a trader can do is to avoid and evade them by not providing them with low hanging fruit to pick or placing a 1-2 tick stop and play dead. After all, they are known to be worst than Grizzlies (they will eat your babies too).

So, instead of confrontation with the Beast, the easiest way for a trader is to place stops at least 3-5 ticks away from the S/R levels. It is like climbing a tree in Serengeti where the Cheetahs and Hyenas can not reach you (But beware of Leopards and Vultures!)

Happy Trading!

here's just a thought. if you're close to a s/r level, why don't you wait with your order to see what happens.

if indeed those levels are getting tested and they do run the stops, you're in a good position (small stops) if your entry is still valid. the bad thing is, if those levels are not getting tested you'll miss the trade.

so it depends a lot about your entry criteria as well.

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  #6 (permalink)
Trading Apprentice
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Under capitalized and fear means stopped out to often.
People try to trade like an auto bot but people can not possibly trade that way.
Then they try to trade like a bank, which they can possibly not.
Taking pain is hard, that's the psychology part.
Stops have to be to protect you when you are badly wrong, not part of your trading like you want them to get hit to save you.
This seems to be misinformation put out by broker/dealers who use your stops to profit.
Risk/Reward ratio is a linear ratio is has no basis in financial markets they are not linear 1/2 2/4.
R/R has never worked for anyone.

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  #7 (permalink)
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For those of you who were in FuturesTrader71 Webinar today:

He basically confirmed that placing 2 ticks stops above or below the S/R levels is an absolute disaster strategy.

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  #8 (permalink)
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Silvester17 View Post
here's just a thought. if you're close to a s/r level, why don't you wait with your order to see what happens.

if indeed those levels are getting tested and they do run the stops, you're in a good position (small stops) if your entry is still valid. the bad thing is, if those levels are not getting tested you'll miss the trade.

so it depends a lot about your entry criteria as well.

Thanks @Silvester17,

Correct. But entry in my opinion is not as important as the trade management and exit criteria. As FuturesTrader71 said today in the Webinar, your entry can be on a coin toss but the profits come from trade management. He also confirmed the hazards of two tick stops at S/R levels.

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  #9 (permalink)
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aligator View Post
For those of you who were in FuturesTrader71 Webinar today:

He basically confirmed that placing 2 ticks stops above or below the S/R levels is an absolute disaster strategy.

He also said that every trade is a 50/50 proposition.

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  #10 (permalink)
Market Wizard
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1nfinlty View Post
Under capitalized and fear means stopped out to often.
People try to trade like an auto bot but people can not possibly trade that way.
Then they try to trade like a bank, which they can possibly not.
Taking pain is hard, that's the psychology part.
Stops have to be to protect you when you are badly wrong, not part of your trading like you want them to get hit to save you.
This seems to be misinformation put out by broker/dealers who use your stops to profit.
Risk/Reward ratio is a linear ratio is has no basis in financial markets they are not linear 1/2 2/4.
R/R has never worked for anyone.

@1nfinlty,

Hitting some major points, can't disagree.

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