Placement of stops

[Skimbleshanks]

How and where to place stops is something which is always difficult to judge, particularly when you're starting out.

Newbies often place their stops far too close, and get stopped out. This is probably because of fear of taking a loss, or not knowing where the good places are to position them. There's nothing more infuriating than having your stop gunned, and then the market turns and zooms off without you.

The placement of stops is an art, not a science. There are a few ways of deciding how and where to put them, usually depending on the timeframe you are trading, and your strategy.

Today, something interesting happened on the Dow and ES (emini S&P futures) - stops were taken out (gunned), and it was easy to see it happening. You often see the 'big boys' (institutions) gunning stops at the beginning and end of trends. It means they get stock/contracts at 'cheap' prices, and the little boys (you and me and all the other retail traders) hopefully get stopped out and therefore miss the resulting move.

If you see stop gunning happening you can often be certain of a significant move about to happen.

The following two charts show the typical amount that the big boys will drop the stock to gun the stops - 12 points on the Dow, and 1 point on ES in these examples.

These examples will illustrate how you need to work out the approximate amount that the market will move during stop gunning, and therefore you need to allow for this when deciding where to place your stops.

First, the 5 minute chart of the Dow:

 

[Skimbleshanks]

Secondly, the 5 minute chart of ES:

 

[ian]

Did you trade these moves?

 

[dsmodi]

v. interesting and useful post skim .... in your opinion is the 12pts and 1 pt on dow and s&p respectively a typical figure?

 

[Rognvald]

Is there anything else we should perhaps be looking for to try to identify when gunning is taking place please?

 

[Skimbleshanks]

There's not very much else to look for - just familiarise yourself with the distance and make sure your stop is outside of it.

It happens on all stocks, all indices, and all futures, in all timeframes. It happens at the tops, and it happens at the bottoms, so if you can identify a likely top and bottom then you can be prepared for the fake-outs (another term for this).

If you look at the Dow chart I posted above, you'll see the same thing happening (ie, taking out the stops of the nervous traders who place them too close to previous resistance or support) at the tops of the swings. The approximate times on the chart are: 10:30, 11:00, 13:30 on the 28th Sept, and just before 10:00 on the 29th Sept. Each of those was a swing top, and on each subsequent attempt at the resistance they took it just a fraction higher to take out the stops, then reversed it. It happened three times in a row.

Here's another example of it happening on the 5 minute ES chart - I've put a red square where the price rose one tick (one quarter of a point) above the previous resistance, then came tumbling down. Anyone who 'bought the breakout' would immediately have been trapped with a losing trade.

They do take practice to spot.