Stop Loss Orders

Hi All,

Has anyone got advice on stop loss orders, what percentage is a good guide to go for. Does it depend on the risk of the stocks you bought. For example a FTSE 100 company is unlikely to plummet too much?

Regards.

stop loss orders are the first thing learners use to lose money

i see so you don't use them then ??

Stop loss points are not, IMO, determined by percentages. They are the point at which you 'know' that the trade has gone t**s up. So BEFORE you even enter the trade you need to work out the t**s up point, and then you can work out your entry point which will be based on the risk.

So work out the exit first, and then work out the entry. And that, therefore, means you've worked out your stop loss point.

And if you don't know the point at which the trade will go t**s up, then you should not even contemplate an entry until you have worked on this to make sure you fully understand.

stevet said:

stop loss orders are the first thing learners use to lose money

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Stevet - you have some very hard and fast rules about what is what in trading. The hallmark of a real pro. I suspect as a professional, you see that as being the only way to trade. And coming up through the professional trading ranks as being the 'only' way to learn. Sorry mate, but that's rubbish.

If it were true, only professionals would ever make money at this game.

One of the biggest mistakes newbie traders make is with not setting or not adhering to their stop-losses.

While a pro like you can probably trade just fine without stop-losses (and I know many pros who don't use them), to suggest to newbies they do the same is just plain naughty.

mrchuffster said:

Has anyone got advice on stop loss orders, what percentage is a good guide to go for. Does it depend on the risk of the stocks you bought. For example a FTSE 100 company is unlikely to plummet too much.

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What is 'too much'? If you're in a trade, when will you know it's not working out? WIll you decide that BEFORE you enter the trade? You should be.

Stop-Loss is (or should be) part of your strategy. Look at support & resistance. Yesterday's High and Low. 52wk High & Low.

I'll get as tight as a 7c stop on $20-$60 stock at times. I take a lot of (small) losses. That's how I now trade. You may not wish to trade that way yourself. But you did ask.

The way I see it - if you're wrong - you're wrong - get out.

Some will suggest using a guide of 2X ATR. That's (often) way too wide for me, but works well for many.

Worst case - look at your max risk per trade. It should be a really small percentage of your total trading capital. 0.5-1.0% - absolute max.

As for FTSE100 stock plummeting too much (or any stock for that matter) - of course they could.

My stop tells me where I'm deciding I'm wrong.

All of the above based on the assumption you're talking about a stop-loss and not a trailing (profit) stop.

Spot on as usual Tony....

TheBramble said:

Stop-Loss is (or should be) part of your strategy. Look at support & resistance. Yesterday's High and Low. 52wk High & Low. .

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Thats the key in using stops....to Identif possible signal points to enter the market with controlled risk . Most seem to enter the market at any old point and hope for the best. Few seem to grasp the idea of identifying pattern points which allow the correct usage of stops, mental or other wise.

TheBramble

stop losses are a very dangerous and expensive thing for learners to use

a trade should be closed when the postiive reason that it was opened have either gone neutral or gone negative - this is key to all trading

a stop loss at a specific level suggests security or insurance - the fact is that learners should concentrate on their reason for entry - not look to protect a bad position with a worse position

Thanks for your input guys

Having stop losses and WAiTING FOR THEM TO BE HIT BEFORE EXITING engenders an attitude amongst learners in which they are prepared to sit and watch their money (and self confidence) being eroded to no effect whatsoever. They are simply buying time in the "hope" and "wish" that they will be proved correct - that is an ego-centric and rapidly self-defeating approach.
If the reason for being in a trade no longer exists, ie the trigger is negated or reversed, why remain in the trade awaiting a stop loss to be hit? You are merely buying time, throwing money away, in the hope of having your ego salvaged by being correct. This business is about being profitable, it is NOT about being right or your ego, self esteem and all that psychobabble.
If you haven't got the mental toughness to accept a trade is wrong and exit immediately, you will fail unless you develop that mental toughness FAST. YOU are not wrong, the trade hasn't panned out, some don't. You are NOT any less a person because a trade doesn't work. It is simply the cost of doing business and has to be regarded as any cost in any business - an element to be minimised in order to keep on trading and maximise profits.
Let's look at an example:
Trader A uses a stop loss of 20c on a trade. She might lose 40% of trades, so out of 10 trades she loses 4 and is 80c down to offset against profits and costs.
Trader B uses a different approach and when a trade is moving against her she exits AS SOON AS THAT SHAPES UP TO BE A LOSS AND EVEN BEFORE IT TURNS INTO A LOSS!. Out of 4 trades she loses say, 7c, 6c, 4c and 3c.
Her total loss is 20c, not 80c like trader A
What effect do you think that has on her bottom line long term?
Now, you might say Trader B isn't giving her trades a "chance" to "work" for her, but she has a deeper understanding of how markets actually move and realises that although the occasional trade "might" come back in her favour, the vast majority DON'T when the reason for being in the trade no longer applies and it is simply not panning out the way she anticipated from her set-up, reading of the market, skills, knowledge and experience.
After 4 losing trades, would you rather be in the position of Trader A or B?
Who is financially better off, who is more professional, who is more self confident, WHO IS IN CONTROL?
Richard

Placing of stop loss orders is better than not exiting a trade that has gone against you and letting it run. Many new traders are just not experienced enough to know when the reason to stay in a trade no longer exists. There are also traders who have great difficulty in closing a losing trade for psychological reasons and again if they can be persuaded to place stop loss orders it at least goes some way to limiting otherwise damaging situations.

Implying that those who use stop loss orders should now abandon them and take up a new mantle that requires a greater skill base is questionnable until they have developed skills to know otherwise. The problem is that traders can take years to develop these skills so what are they to do in the mean time if they do not place stop orders ?

Depending upon skill level and the pace of ability to learn I would suggest different approcahes to this subject but in my view there is not a "one size fits all approach".


Paul

using the wrong method, because you have not learnt the right method, is not a solution to the problem

but i absolutly get that many experienced traders would be nervous of suggesting that learners have totaly unproteced outright positions in the market - i just happen to feel that it is quicker and cheaper in the long run for those learners who are going to make it as traders in the end - to take the pain of unprotected positions - in the hope that it moves them to learn more quickly to evaluate and close non-performing positons correctly

Whilst I understand and respect the perfectly valid comments made by the last two posters, my own opinion is:
1. that anyone trading should know why they are in a trade to begin with and when it is going against them
2. new traders should have strict rules they can apply for entries and exits to maximise profits, minimise losses - these reduce the psychological pressures of trading and the discretionary element which adds to the stress for inexperienced traders
3. the sooner you start with good habits the less likely you are to create bad ones
4. the cause of a problem should be eradicated rather than the symptoms alleviated

All of the above, is, of course, merely my opinion.
People need to look at differing views and not only consider what seems logical and sensible, but try and place those ideas within the context of how they individually experience their own trading.
Richard

I agree with stevet the way to trade is to get out of a losing position asap, the problem is that the majority of traders will never do that.

Richard

Having a very tight stop or trailing stop will mean that you get stopped out much more often and so your example may not be correct.

I have just backtested 120 trades with no stops 1247pt profit, with 29pt stop 1283 and with 39pt stop 1368 which is nearly 10% extra profit.

Stops should be placed at the open of a trade in case of loss of connection, bombings and other exceptional events, I have seen the Dow move 200pts in 2 minutes with a suprise move intraday in interest rates by the Fed, if you were on the wrong side without a stop it could have been devastating.

juanbyte

i think that you are agreeing with me, but adding that a wide stop should be placed in such a place that in ordinary trading, it would never get hit, but in an "extreme" move - caused by some sort of out of the ordinary event - that a wide stop should be set to protect you

the problem is that a stop is not a guaranteed exit position - its a market order - so only gets filled in its turn in the queue and when someone is offering size

so by having an "emergency" stop - you will probably find that you get a fill right at the bottom of the move anyway - so having the stop may well not achieve anything - and my own personal experience of "extreme" events - is that the market has given me the same exit signal for the trade i was in - as it would have given in a normal market - and the real fast move always seems to have a little delay - so personally i would never use an "emergency" stop since i feel the exit would be as bad as it could be anyway and from experience - i have not seen it to be required

stevet said:

a trade should be closed when the postiive reason that it was opened have either gone neutral or gone negative - this is key to all trading

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Stevet - I believe if you can add some specificity to those situations it would be welcomed by those who find the thought of trading without a stop-loss unusual.

Not for the beginners who relish the sheer hard-a*rsed power of no limit trading, but for the majority(?) of experienced traders who use it to limit losses after having experienced the 'fun' of trading without them.

Mr. C - your last two post rather contradict each other and may cause inexperienced (and experienced!) traders some confusion. Are you advocating no stop-loss or a stop-loss?

Mr. Charts said:

Having stop losses and WAiTING FOR THEM TO BE HIT BEFORE EXITING engenders an attitude amongst learners in which they are prepared to sit and watch their money (and self confidence) being eroded to no effect whatsoever.

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AND

Mr. Charts said:

new traders should have strict rules they can apply for entries and exits to maximise profits, minimise losses

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TheBramble

a stop loss is thought to be a specific position taken in the market in order to protect a position - which it doesnt do either from the trading viewpoint or the technical viewpoint- since it is a market order triggered at the price you set - so the actual fill will only occur at a point where someone decides to take the other side of your exit - and this could be way way below your envisioned level and in fact - at a support level from which the market will trade back up to where it was - so you end up with a much greater stop loss and someone like me trading off others stops - may enjoy a quick run up and then close the position for a quick turn

but to get back to the original point about how to protect a position - you have to have a reason for entering the position in the first place - and that reasoning was dynamic - that is - you decided to enter for specific reasons, but at a specific moment in time - so you exit should be dynamic as well - so when the positive things that caused you to enter the trade - go to neutral or go to negative - you should immediatly close the position - either in profit hopefully or with minimal loss - but you do dynamicaly in relation to what is happening to your trade at that moment in time - just as you felt you were doing when you opened the position

so the way to protect the position is to have your finger on the close button and hit it at the precise right moment

not put a stop loss in - where everyone else is more than likely going to - and just where all the size in the market is going to be pulled - so that the stop loss level gets blown away and someone picks up value at the over sold position

so the way to get your safest trade in - is to really figure out if your reasons for entering make sense and then you will you also know when to exit

I guess that the person who started this thread as well as anyone else interested in learning a little more about the subject is really confused now.

But hey, that's part of trading - there are many styles of trading and many of them work for different people.

So please correct me if I have picked this up wrong, but I am trying to filter my way through some of the main comments and make some sense of them for anyone who is trying to learn here.

Concerning the experienced and profitable traders...

- Some set stops others don't
- Both are able to determine when a trade has gone wrong (that is the stop).
- It is simply that some people choose to enter a stop on the system, and other choose (and have the psychological discipline) to take the loss manually.
- Those who set stops on the system do so for various different reasons they feel important.
- The KEY is being able to tell the point when a trade has gone belly up.

My own thoughts...

Find the position where you believe a trade has gone wrong (This can change tick by tick). Personally I do it by looking at the chart to see the price movement in that given period. If I am trading a Nasdaq stock, I also use Level 2 to get a feel for the flow of the stock once in the trade.

If you are happy and able to take the stop manually ( I personally feel most new traders aren't though), then do so.

If you cannot do that for what ever reason eg. hesitate to take the stop, or maybe the trade is a swing trade and you won't be sitting in front of your screen for 4 days solid, then place a stop on the system and move it if appropriate to lock in profits.

The easiest to understand source for where to put stops that I have found is some of the Pristine material www.pristine.com. The seminars on CD or the book "Tools and Tactics for The Master Day Trader" (it doesn't just deal with day traders).

These cover various trading styles and examples of stops. Some people will of course disagree with their methods, but they do give clear indication of where they put stops for different trading styles.

From there a trader can, and should, further develop his or her own style of trading and stop management.

Just don't go bankrupt whilst you are learning.

ardhill said:

- It is simply that some people choose to enter a stop on the system, and other choose (and have the psychological discipline) to take the loss manually..

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I think you may have hit the nail on the head, and not, at the same time. If you didn't have a stoploss - you'd simply never exit a bad trade.

Even Stevet has a stoploss - he may well 'decide' dynamically when to get out of a 'bad' trade. It'll maybe be based on the the dynamics of the market 'right there & then' (volume, momentum, experience, 'feel', whatever etc) but there will be a stop at some point.

The issue of whether it's manually placed or 'systematically' placed is another issue altogether. I always have a mental stop and never place it systematically. So yes, I do have the psychological strength to adhere to a mental stoploss. But it is still very much 'set in stone'.

I don't blame you for being confused. We're just traders. Knowing how to do it is one thing - being able to articulate it for others is another altogether. Which is why I was so interested in Mr. Charts' apparent contradiction. If the creme de la creme can't make sense what hope is there for the rest of us?

i definetly do not use a stop loss - i CLOSE a trade when it is appropriate - be it in profit, a scratch or a loss

a stop loss is a position determined by price - nothing else - and just using 'price' without 'time' is going to cause losses to build and build and ......

sure there are going to be those who trade irreguarilly and who have one trading style and might end up riding trends by default - and with stop losses in place will feel they have trading by the short and curlies - but once the cycle turns - they are going to start accumilating losses and then disapear into the stop loss abyss!