Stop loss or % of capital?

[Kunal]

Using a stop loss of 5%, I find that very often my stop is triggered after which the stock moves up again. Also, after the trade is in profit, by using a trailing stop I'm limiting the amount of profit that can be taken.
After all, how many stocks would move up continously without dropping 5-10% somewhere along the way?
By using a %age of capital, say 4% all these issues could be avoided and the trade would never be stopped out, but the disadvantage of limiting profit appears.
What is a reasonable solution to this?

 

[garethb]

The problem is that the market doesn't give a s**t how much you feel you can afford to lose on the trade. Before you enter the trade decide what price level would indicate that your reasons for taking the trade are no longer valid and work from there. If you can't accept that loss and feel relaxed then trade smaller size or don't take the trade.

Best of Luck

Gareth

 

[apples10]

Using a stop loss of 5%, I find that very often my stop is triggered after which the stock moves up again. Also, after the trade is in profit, by using a trailing stop I'm limiting the amount of profit that can be taken.
After all, how many stocks would move up continously without dropping 5-10% somewhere along the way?
By using a %age of capital, say 4% all these issues could be avoided and the trade would never be stopped out, but the disadvantage of limiting profit appears.
What is a reasonable solution to this?

Much better and easier using an absolute stop initially and then moving it upwards (if long) as stock/index moves in your favour.

I look for previous support levels or levels of ma, then set the stop slightly below these levels (in expectation that the market guesses where stops are and tries to hit them before reversals).

Still get hit occasionally on stops and see the equity/index move as expected, but thats a market for you!! Much better that than watching capital blown!

good luck.

 

[Kunal]

So both of you are in favour of trading 100%capital with a previously defined stoploss.
What is the optimum stop% to use for trades that last 4- 5 days?

 

[apples10]

So both of you are in favour of trading 100%capital with a previously defined stoploss.
What is the optimum stop% to use for trades that last 4- 5 days?

Who said that .. .??

Certainly NOT !!

It depends on whats being traded, but I wouldn't be happy with more than 15% of Capital in one trade, even with a stop in place.

This business is all about money management, putting 100% of capital in one trade is a rcipe for disaster in many ways.

optimum stop % ? as i said above, there isn't one, depends on whats traded.

rgds

 

[garethb]

Kunal

You've misunderstood me.

The way I work is this. Before I take a trade I identify the price level at which my analysis becomes invalid. My stop is a bit below this. Based on current entry price I know the dollar amount of risk per share/contract etc. % does not come into it I don't even work out what that % is. As I said the market does not care about your % stop. I calculate number of shares/contracts to trade based on accepting the risk of losing that dollar amount on each one.

I cannot tell you what % to be happy losing on a trade that is personal to you. If you are a recreational trader with a small "pot" which you could replace by 3 months saving from the salary of your day job your risk % may be high. If you are trying to live off your life savings with no other source of income it may be a lower %. Some conventional wisdon says 2% at risk personally I put less than 1% at risk.

In my experience If I am not completely comfortable with the amount of money at risk on a trade I cannot read the tape clearly and do not make good exit decisions.

Best of Luck

 

[cbond1]

Forget % of capital as exit strategy

Using a stop loss of 5%, I find that very often my stop is triggered after which the stock moves up again. Also, after the trade is in profit, by using a trailing stop I'm limiting the amount of profit that can be taken.
After all, how many stocks would move up continously without dropping 5-10% somewhere along the way?
By using a %age of capital, say 4% all these issues could be avoided and the trade would never be stopped out, but the disadvantage of limiting profit appears.
What is a reasonable solution to this?

Each trade is like a bus... there's (hopefully) another one along soon. The road to confusion, frustration and loss will be inevitable, if u try to use a percentage, as an exit strategy. Think about it, its completely loco..... as an individual trader with limited resources - you have to base all your decisions on technical indicators..... whether moving averages or chart break outs or break downs and accordingly a stop should always be based on a recent ''significant'' chart support or resistance level. To pick a percentage means that your stop is based on the monetary value or entry price of your original trade, which is a personal reference point to u, and to which the rest of the world has no knowledge and doesnt care. Believe me support and resistance area's are used by winning traders... I've never heard of winning via % stop losses.

 

[Kunal]

Thanks, for all your comments and advice.
gareth,
"Some conventional wisdon says 2% at risk personally I put less than 1% at risk."
Your entries must be on the dot to be able to use this low figure. What is your average trade holding time?
I did attempt to use 2% stops some time ago but found about 75% of trades were being stopped out so I increased it.
Do you think your win% would increase if you used a larger stop?

cbond1, I use support/resistance as the basis of the stop. My entries are a bit late tho, I need to have more confidence in pulling the trigger.

 

[TheBramble]

I did attempt to use 2% stops some time ago but found about 75% of trades were being stopped out so I increased it. Do you think your win% would increase if you used a larger stop?

Kunal, that is something you can check yourself by looking at what level you would have had to set the stop to avoid being stopped out. However, this falls into the realm of back-testing and opens you up to the possibility of curve-fitting or over-optimisation. If 75% of your trades were stopped out because they were simply bad trades, increasing your stop will only increase your losses. You need to work on getting more 'right' trades' and worry less about stops as a factor in the trade.

Which brings me to the more important aspect of what you're asking. Your win% is a function of your trade setup, entry, execution and exit. Before any of these make sense you need to have an empirical basis for assessing the risk of each trade.

The 1% and 2% data being bandied about are (I hope) relating to your RISK per trade, not the amount of your trading capital employed per trade. 1% is a personal max for me - YMMV.

As another member alluded to above: Use 'obvious' (yes I know, easier said than described) stops such as major Support or Resistance. If that means a 50c stop, that may well be within your acceptable criteria for taking a trade. If so, how many 50c-worth can you lose for 1% of your capital? If you're trading $100,000 capital base than you will consider risking (in this hypothetical example) $1000 on any trade. So for this example, that would mean you could take a 2000 share position.

I suspect you're not setting your trade size as a function of your risk. This needs to be addressed first. Once you know what your max risk for any trade is AND the stop, it's a simple matter of basic arithmetic to establish your position size.

All of which is quite pointless unless you're getting the overall trade setup right in the first place.

 

[garethb]

Kunal

You've misunderstood me again. I'll have one more try

My stop has nothing to do with a set % drop in the price. I decide my stop based on a price which should the market reach it would prove me wrong, for example. I decide some level which might provide support based on some analysis and my stop goes below that because if it is hit then the level did not provide support this time and I have been proved wrong.

I decide my entry point and I don't even bother to consider what % drop that the entry price and stop represents. Honestly I just don't know. I would have to go and analyse my historic trades to be able to have any idea.

My 1% figure has no impact at all on how likely I am to get stopped or how accurate my entries are. It is the amount I will lose if my stop is hit. All it does is determine what quantity I trade.

This is not original thinking it is a very common and simple money management strategy described in many books. "Come into My Trading Room" by Alexander Elder springs to mind as a good introduction to this and a whole range of trading ideas which you might find useful.

Best of Luck

Gareth

 

[TWI]

The other thing to consider is that where you have placed your stop is more than likely where everybody else has also so you will be stopped out with everybody else. You have to give yourself a little more space to avoid getting caught in the rush. It means you hve to trade a little smaller to allow for the extra potential move but you will be far more likely to stay with the winners.

 

[fxmarkets]

Kunal, you mention confidence when it comes to pulling the trigger, this is likely to be as a result of you taking hits, more than you anticipated, i'm assuming a lot so correct me if not on right line. this usually comes about because the method of entry setup is either not correct (not good enough,very risky) or not being executed correctly by you according to the trade idea setup.

I trade shorter timeframes but can apply that logic to those so it may be relevant to you.

swing trade, 3/ 4 days daily bars? whats your trade setup, sequence of 3 or 4 lower highs, the price is pulling back ,falling right, you need to buy it according to your trade setup. is that your idea? how do you feel with buying into prices that are marked lower, if thats your plan? or do you buy a break upside?

the point I'm heading to is until you gain total confidence or are happy that you know in great detail how you will enter a trade , at the correct time according to your plan and trust yourself to do that, then you may struggle until you sort this out.

you say you are late into trades? why ? you are increasing your risk and you want to increase your stop to compensate for your lateness of placing an entry? thats 2 increases of risk straight off. all because you are late

can you post a chart of a recent trade you have done, or explain your trade idea, what you are trying to achieve.

and the ironic thing is if you take the entry on time, it may yield in a shorter stop required and a better fill on price, decreasing your risk on 2 aspects instead.

but you can work on it, as we all have to. and have done.

like i said I'm assuming a lot , guessing as to how you may or may not trade, seasoned members may be able to assist more if they had finer detail.

posting a chart would assist... of a typical trading experience you encounter.

 

[SOCRATES]

Each trade is like a bus... there's (hopefully) another one along soon..........Believe me support and resistance area's are used by winning traders...........

I am tickled pink by you mentioning a BUS......... and the idea that support and resistance areas are used by winning traders...because both concepts are additionally used in mainstream to illustrate ideas, not withstanding dramatic irony.

I am veribizzi at the moment, but will find an appropriate opportunity to comment as and when a suitable opportunity arises, hopefully soon, let's see.

 

[charliechan]

why not place your entry where you would have put your stop?

we know every one else puts their stop there.

we know its gunna be ran.

we know it usually comes back.

we know doing things in reverse is where the difficulty comes in, as trading is very anti intuitive at the beginning.

we know there is no reward without a lotta hard work.

 

[SOCRATES]

.................. is very anti intuitive at the beginning.

Yes, absolutely.........therefore taking any of a variety of wrong turnings leads to unowhat.

 

[Chicken Curry]

why not place your entry where you would have put your stop?

This is what I tend to do a lot of the time and it is a nice way to go.

we know there is no reward without a lotta hard work.

Never has a truer word been spoken.

 

[Kunal]

fxmarkets,
"Kunal, you mention confidence when it comes to pulling the trigger, this is likely to be as a result of you taking hits, more than you anticipated"
You hit the nail on the head
"you say you are late into trades? why ?"
I wait to confirm that the price is moving my way
" you are increasing your risk and you want to increase your stop to compensate for your lateness of placing an entry?"
Thats what eventually happens because of waiting. The price does move as I expected but at some point reverses and triggers the stop. I'm not using any system, just a mixture of MAs, S/R and volume, it's purely discretionary.
Nobody has commented on using 2% of pot with no stops. Anyone actually backtested or using this?

 

[RUDEBOY]

What was the point of this discussion? This thread?

Think about it?

WHERE SHOULD I PLACE MY STOP?

PERCENTAGE ARGUMENTS?

Get with the programme folks.

IF YOU DON'T KNOW ABOUT STOPS.....YOU DON'T KNOW ABOUT ANYTHING!

I'm not saying it's all easy, but, entry, exit and stops are all related!

Related to price.

They are all equal in importance.

 

[SOCRATES]

What the f**k was the point of this discussion? This thread?

Think about it?

WHERE SHOULD I PLACE MY STOP?

PERCENTAGE ARGUEMENTS?

Get with the programme folks.

IF YOU DON'T KNOW ABOUT STOPS.....YOU DON'T KNOW ABOUT ANYTHING!

I'm not saying it's all easy, but, entry, exit and stops are all related!

Related to price.

They are all equal in importance.

I agree with you.

I have a minute...and I am sitting here thinking.....wondering if these serial repeated questions about stops are windups....because they keep on being asked all the time.

No sooner are they answered in detail, than the answers are forgotten, and the same cycle starts all over again, as a sort of member of the same family of questions.:cheesy:

Or it may be...that repeated questioning about the topic of stops is some sort of aversion to dealing with and confronting realities.

Hummm...

 

[RUDEBOY]

Hello, Soccy. Good to see you back.

What do i think?

Wind up, or not, logic and reality is not on the cards.



If a person knows price action on whatever timeframe, then why...?