Stop loss analysis

[Hunter99]

I have read that one of the most important aspects of trading on the markets is money management. This alone can determine if you make a profit or suffer a loss, in fact one expert has even stated that trading is 75% to 95% about money management . One of the key elements of money management is the application of a stop loss however I have not yet come across any plausible mathematical formula that allows you to set a stop loss level and be reasonably confident that the stop loss will not be triggered too early because of normal, random fluctuations in the market price or triggered too late resulting in a larger than necessay financial loss. Most of the stop loss strategies seem to suggest that you should set the level based on a percentage of your own personal bank or "what you can afford to lose" however this doesn't appear to be very scientific. I would have thought that the stop loss should be related to the prevailing market conditions taking into account the volatility within a given time frame. There is a wealth of information on chart and trend analysis and yet the most important aspect of trading i.e. money management has not been covered in anything like this level of mathematical detail unless of course somebody can point me in the right direction?

 

[garethb]

Great to have a rare opportunity to discuss stops.

Some recent discussions here. Including possibly valuable insight on trading psychology and kitchen appliances.

http://www.trade2win.com/boards/showthread.php?t=18519&page=1&pp=10


Also see ATR which some use as volatility based trailing stop - maybe not so usefull for initial stop though.

http://www.trade2win.com/knowledge/articles/general_articles/average-true-range-indicator/

Regards,


Gareth

 

[dc2000]

IMO your stop loss should be set by

Percentage of capital on risk ( usually 1 to 3% ) divided by 1/3rd market volatility = number of contracts or £per point at X points

This stop should then be placed with reference to recent market movements S/R etc

 

[Charlton]

I have read that one of the most important aspects of trading on the markets is money management. This alone can determine if you make a profit or suffer a loss, in fact one expert has even stated that trading is 75% to 95% about money management . One of the key elements of money management is the application of a stop loss however I have not yet come across any plausible mathematical formula that allows you to set a stop loss level and be reasonably confident that the stop loss will not be triggered too early because of normal, random fluctuations in the market price or triggered too late resulting in a larger than necessay financial loss. Most of the stop loss strategies seem to suggest that you should set the level based on a percentage of your own personal bank or "what you can afford to lose" however this doesn't appear to be very scientific. I would have thought that the stop loss should be related to the prevailing market conditions taking into account the volatility within a given time frame. There is a wealth of information on chart and trend analysis and yet the most important aspect of trading i.e. money management has not been covered in anything like this level of mathematical detail unless of course somebody can point me in the right direction?

Hunter
Basing stoploss on what you can afford to lose is not at all scientific. The market does not care how much is in your bank account or what you can afford to lose.

Such a strategy merely says - I have no idea what's going to happen with this stock.

It's more important to understand the stock and the market - to understand the volatility, to understand the true intentions of market makers, to understand what's really happening with price and volume and not to be fooled by the events being "revealed" to you.

Stick with a stock and study it carefully. Study it from all angles and get to know its many faces. Once you do that then you can maintan tighter stops.

The ultimate question to ask is - can you truly know the market and the stock so well that "random price variations" could no longer exist to hit the stop ?


Charlton

 

[walker123]

I think in 90% of the trades you should know your S/L before you enter the trade,you can move your S/L but within limited range

 

[TraderPattern]

IMO your stop loss should be set by

Percentage of capital on risk ( usually 1 to 3% ) divided by 1/3rd market volatility = number of contracts or £per point at X points

This stop should then be placed with reference to recent market movements S/R etc

dc2000

A 3% risk per trade will result in a highly volatile equity curve. Even a 1% risk is on the high side from my perspective. These days, I generally use a 0.25% risk for my trades, and am doing very well.

TP

 

[Windowsill]

If you put historic price details on a spreadsheet its quite easy to find an optimal stop. On the dow you may find over the short term, no stop at all works quite well!!! Much depends on your time frame, and risk profile though. At the other end of the spectrum, if you take Vodaphone and your a spreadbetter you can only lose 130 points! How likely is that?? So what would be your £ position then in relation to your Bank? What would your time frame be..another way of putting it, how long & at what level are you happy to sit on a loss?? I feel that stops are needed but really imho its best to get the trade right in the 1st place (whatever right means) and see the stop as a calamity measure.