MarketMaster
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I received an email from a trader asking
for advice on where to place stops. There
are two approaches to determining where
to place stops:
1.Have a predetermined limit for the maximum
amount you are willing to lose for each trade
and place your stop appropriately. So if you
are willing to risk £100 in a FTSE Futures
trade (10 points), you would automatically
place your stop 10 points below (or above
when shorting) your entry price.
2.Let the market determine the best stop
position. If you are looking at a chart and
have put on a short position, you could place
a protective buy stop one tick above the most
recent high. If you have access to Depth of
Market data, you could place your stop behind
a large order in the DOM.
The best approach is a combination of the
two: determine the maximum amount you are
willing to risk on each trade, lets say £100; then
before you place your trade, look to see if there
is an obvious place for your protective stop,
either on the chart or in the Depth of Market.
If the obvious stop is within your loss limit (i.e.
less than 10 points in this example) go ahead
and place the trade and your stop. If on the other
hand the stop is beyond your loss limit (greater
than 10 points) then wait for a better entry position.
Of course this is easier said than done, because
when you think the market is running away from
you, you won’t want to be bothered by sticking to
your stop loss limits; but by doing so you will cut
out the majority of your riskier (losing) trades.
I am very interested in what determines success
in trading and have long been of the opinion that
success is not down to trading systems and secret
formulae. I believe that trading is a skill that we can
all develop to one degree or another. The question is,
why do some people go on to develop that skill fully,
while most quit at the first hurdle?
Well, I have come across a very interesting set of
tapes by a guy called Jack Zufelt (honest) that deals
with that very question. He is not a trader and the
tapes are not aimed at traders, but I think his
material is very relevant to traders. You can check
out his stuff at:
http://www.realwealthnow.com
for advice on where to place stops. There
are two approaches to determining where
to place stops:
1.Have a predetermined limit for the maximum
amount you are willing to lose for each trade
and place your stop appropriately. So if you
are willing to risk £100 in a FTSE Futures
trade (10 points), you would automatically
place your stop 10 points below (or above
when shorting) your entry price.
2.Let the market determine the best stop
position. If you are looking at a chart and
have put on a short position, you could place
a protective buy stop one tick above the most
recent high. If you have access to Depth of
Market data, you could place your stop behind
a large order in the DOM.
The best approach is a combination of the
two: determine the maximum amount you are
willing to risk on each trade, lets say £100; then
before you place your trade, look to see if there
is an obvious place for your protective stop,
either on the chart or in the Depth of Market.
If the obvious stop is within your loss limit (i.e.
less than 10 points in this example) go ahead
and place the trade and your stop. If on the other
hand the stop is beyond your loss limit (greater
than 10 points) then wait for a better entry position.
Of course this is easier said than done, because
when you think the market is running away from
you, you won’t want to be bothered by sticking to
your stop loss limits; but by doing so you will cut
out the majority of your riskier (losing) trades.
I am very interested in what determines success
in trading and have long been of the opinion that
success is not down to trading systems and secret
formulae. I believe that trading is a skill that we can
all develop to one degree or another. The question is,
why do some people go on to develop that skill fully,
while most quit at the first hurdle?
Well, I have come across a very interesting set of
tapes by a guy called Jack Zufelt (honest) that deals
with that very question. He is not a trader and the
tapes are not aimed at traders, but I think his
material is very relevant to traders. You can check
out his stuff at:
http://www.realwealthnow.com
