Stop Losses

[farthing]

Thats cool and glad to hear you on ya way. Only thing id say is its your entry that probably needs the work. Not your stop.

Gl

Hi DarkOne,

Yeah I've been working really hard on entry points (over 200 hrs) and I think I've come up with a really good system for that. It's just targets and stops that I'm still working out. BTW that trade eventually yeilded up 240 pips. I closed it late Friday with a view to getting in again on Monday. In a perfect world my target for this one would have been 300 pips, giving me a 2:1 risk/reward ratio ratio. I'm always aiming for 2:1 because, assuming that the law of averages plays out (i.e. 50% wins - 50% losses), even with really bad analysis you should still make money over the long term if you let your profits run to two times your risk in each trade. So if you open 10 positions at 0, each with a stop of -100 and a target of 200, if you lost 5 and won 5 your profit would be (-500+1000)=500. With this kind of management you would only need a 40% success rate to make money and even at just 30% success you might still break even with trailing stops. I'm just a newbee but for me the money management aspect seems to be more valuable even than analysis of the instrument .

 

[darktone]

I heard a story about this guy who made $2 mil by accident! He basically changed his broker, left a trade open with his previous broker and forgot about it for two years.

That is f*****g priceless! :clap:.. A definate message!... Probably a left over from a min scalp!

 

[darktone]

Hi DarkOne,

Yeah I've been working really hard on entry points (over 200 hrs) and I think I've come up with a really good system for that. It's just targets and stops that I'm still working out. BTW that trade eventually yeilded up 240 pips. I closed it late Friday with a view to getting in again on Monday. In a perfect world my target for this one would have been 300 pips, giving me a 2:1 risk/reward ratio ratio. I'm always aiming for 2:1 because, assuming that the law of averages plays out (i.e. 50% wins - 50% losses), even with really bad analysis you should still make money over the long term if you let your profits run to two times your risk in each trade. So if you open 10 positions at 0, each with a stop of -100 and a target of 200, if you lost 5 and won 5 your profit would be (-500+1000)=500. With this kind of management you would only need a 40% success rate to make money and even at just 30% success you might still break even with trailing stops. I'm just a newbee but for me the money management aspect seems to be more valuable even than analysis of the instrument .

Well done with the trade, what was it btw? where did you enter and exit? could do a screenie perhaps?.
Most of what you said is very sound. heres some of my thoughts on these bits.

analysis:- It is important! It tells you when you act but imo as you suggested, MM is far more important.

risk/reward:-Its tempting to get caught in ratios and stuff eh, the way i see it aim to risk as little as you can and try and keep reward as open ended as possible. If the market is trending this shouldnt be to much of a problem. Another way to see a RR ratio perhaps would be a minimum requirement to take the trade that way you have a built in minimum expectation.

As i said b4.. well done!

 

[moreliver]

Yeah, well done farthing. I suggest that your wider stops are a function of the present level of volatility and you may not need them as wide as you have them in all trades. I started getting stopped out a lot last summer when my usual method of setting stops ran foul of what became an increasingly volatile market. May was hunky-dory, June saw the market roll over gently, July and August- well, need I say more? September it was still nutso and I withdrew and reviewed my methods completely (that said, I made back back my Jul-Aug losses first ).

Anyway, it's probably worth measuring (at least roughly) the volatility of the market you're considering entering to help you place your stops outside the noise levels at that time.

Ooh, I found this on another thread. Might be useful.

 

[gamma]

Moreliver, interesting and very informative article.
Something else that does help with not getting drowned in a wrong trade is
Putting a small trade in to test the water and then if it is going your way increase your stake.
I believe the great Jesse Livermore employed a similar technique of testing the water.

 

[charttrainerdotcom]

Today crude oil gave us a perfect example for the necessity of stop loss orders:
1) After the bullish trend lost its momentum crude came back from 102 USD to 99 USD
2) I bet a lot of traders were short (well, at least I was; see my posted trades...)
3) Then, out of the nothing, the trend changed somewhere around 99.4 USD and slowly went from bearish to bullish
4) Shorties that didn´t get out by that time got squeezed by a tremendous 2% move (up to 101.8 USD) in less than 1 hour.
5) At a leverage of 50 a 2% move against you means that your position is gone... unless you had a stop loss in place.

 

[charttrainerdotcom]

Moreliver, interesting and very informative article.
Something else that does help with not getting drowned in a wrong trade is
Putting a small trade in to test the water and then if it is going your way increase your stake.
I believe the great Jesse Livermore employed a similar technique of testing the water.

That surely is a good technique but it requires a lot of discipline. And often discipline is what´s missing... well, many of my loss trades are a result of a lack of discipline. Example: quick trades against the major trend.

 

[bolts]

The only way to really understand stops is to backtest. Then backtest again and again and look at virtually all the public Expert Advisors for MT4. This takes months/years but eventually you spot the weakness in some systems and strengths in others. Never forgetting the market changes over time. Generally euro runs in 6 months cycles of ranging or trending and each type of market requires a different technique.

Prior to October 2006 right back as far as 2001 scalping systems worked extremely well but since then fading the moves has become increasingly greater risks. Im not going to spill all my findings but i have determined by a special formula what i call the Scalper Compliance Index. During the 2006 metatrader competition there was several fading/scalping EA's that made it to profit after 3 months. During the 2007 contest out of 650 EA systems only 25 made profit after 3 months and 18 made immense gains. Everyone of the scalping EA's crashed and burned within a few weeks. These best performing systems were trend followers and the average trade time was 17 hours. The market is still trending strongly now at 2008 and IV is set to increase more till Q3. IV is extremely important i cant emphasize this enough that your stops must be a function of IV or historically ATR. Simply using a 30 stop will always fail when daily range on euro is running over 120+ pips right now.

Generally speaking i would not scalp under current market conditions on any majors. The RR is very bad. The best and simple style at the moment is the weekly breakout system. Set a breakout on monday and wait till friday to close. This simple system without indicators has stomped up well over 400 pips a month since last summer. The stops and tp's are a direct function of IV for each pair. Just look at the size of the weekly candles

 

[theroguetrader]

The only way to really understand stops is to backtest. Then backtest again and again and look at virtually all the public Expert Advisors for MT4. This takes months/years but eventually you spot the weakness in some systems and strengths in others. Never forgetting the market changes over time. Generally euro runs in 6 months cycles of ranging or trending and each type of market requires a different technique.

Prior to October 2006 right back as far as 2001 scalping systems worked extremely well but since then fading the moves has become increasingly greater risks. Im not going to spill all my findings but i have determined by a special formula what i call the Scalper Compliance Index. During the 2006 metatrader competition there was several fading/scalping EA's that made it to profit after 3 months. During the 2007 contest out of 650 EA systems only 25 made profit after 3 months and 18 made immense gains. Everyone of the scalping EA's crashed and burned within a few weeks. These best performing systems were trend followers and the average trade time was 17 hours. The market is still trending strongly now at 2008 and IV is set to increase more till Q3. IV is extremely important i cant emphasize this enough that your stops must be a function of IV or historically ATR. Simply using a 30 stop will always fail when daily range on euro is running over 120+ pips right now.

Generally speaking i would not scalp under current market conditions on any majors. The RR is very bad. The best and simple style at the moment is the weekly breakout system. Set a breakout on monday and wait till friday to close. This simple system without indicators has stomped up well over 400 pips a month since last summer. The stops and tp's are a direct function of IV for each pair. Just look at the size of the weekly candles

Theres nothing to understand about stops - they are what they are... !! - Just use the chart and put them in the CORRECT place....... !!

ie - say below a hammer or below a hanging man (which is the same - but comes after an uptrend)..!! Just wait for the candlestick after the hanging man to close BELOW the hanging mans real body...!!
The trend is about to REVERSE direction ... !!

 

[bolts]

Theres nothing to understand about stops - they are what they are... !! - Just use the chart and put them in the CORRECT place....... !!

ie - say below a hammer or below a hanging man (which is the same - but comes after an uptrend)..!! Just wait for the candlestick after the hanging man to close BELOW the hanging mans real body...!!
The trend is about to REVERSE direction ... !!

Well its a no win conversation really as it depends on your style of trading. All im saying is there are systems that perform better for different markets and thus require different stops. ie. for a scalping system i often used say a 50 stops just to collect 10 pips. On the surface you think this is crazy but when the market is right i can fit 8 or 9 ten pip trades inside that 50 stop window so that my profit is greater then my loses. For a trend following system i might use a 100 stop for a tp of 250. It all depends what im doing. I dont rate candles too highly personally i found in my 8 years full time trading they offer little advantage to what the market will do next but if you have luck with them then great All i can say if candles were so reliable it would be easy to do pattern recognition on a candle and make a profitable trading system. People have tried for years and failed.

 

[theroguetrader]

Well its a no win conversation really as it depends on your style of trading. All im saying is there are systems that perform better for different markets and thus require different stops. ie. for a scalping system i often used say a 50 stops just to collect 10 pips. On the surface you think this is crazy but when the market is right i can fit 8 or 9 ten pip trades inside that 50 stop window so that my profit is greater then my loses. For a trend following system i might use a 100 stop for a tp of 250. It all depends what im doing. I dont rate candles too highly personally i found in my 8 years full time trading they offer little advantage to what the market will do next but if you have luck with them then great All i can say if candles were so reliable it would be easy to do pattern recognition on a candle and make a profitable trading system. People have tried for years and failed.

why would you scalp for say 10 pips, when you could just go with the flow and pick off 1000 ...?

a candlestick is a candlestick..... !! - theyve been around for like 300 HUNDRED YEARS - i tend to go with whats worked in the past...!!

Doji - (ALWAYS OBEY) -
Bearish Engulfing Pattern
Bullish Engulfing Pattern
Dark Cloud Cover - (always like that one)
Shooting Star - (use for your stop) - (what happens after WILL make you LOTS of $$)
Morning Star - (always GURANTEED to make you LOTS of $$ too)


It doesnt matter what you THINK a market will do next - a market will ALWAYS do WHAT IT WANTS TO DO ...!!


Saucers and TRIANGLES will make you L O T S of $$ too...... !!

 

[dcraig1]

why would you scalp for say 10 pips, when you could just go with the flow and pick off 1000 ...?

a candlestick is a candlestick..... !! - theyve been around for like 300 HUNDRED YEARS - i tend to go with whats worked in the past...!!

Doji - (ALWAYS OBEY) -
Bearish Engulfing Pattern
Bullish Engulfing Pattern
Dark Cloud Cover - (always like that one)
Shooting Star - (use for your stop) - (what happens after WILL make you LOTS of $$)
Morning Star - (always GURANTEED to make you LOTS of $$ too)


It doesnt matter what you THINK a market will do next - a market will ALWAYS do WHAT IT WANTS TO DO ...!!


Saucers and TRIANGLES will make you L O T S of $$ too...... !!

Are you selling something. Certainly sounds like it.

Stops are an exceptionally difficult topic, and suggesting that it can be reduced to reading the tea leaves in some candle formations is not very useful.

In general investors don't use stops and I'd bet that in general investors are more successful than most wannabe traders - because of the long term uptrend in stock markets. In other words they have got the direction right.

Of course if you start daytrading the DAX (for example) without stops, you won't last very long. But there is whole world of approaches to making money from the markets that reduce or sidestep the importance of stops. For example trading a (suitably chosen) basket of stocks in the direction of the broad market. No need for individual stops - just get out or hedge with futures if you get the market direction wrong. Or another example is market neutral (long/short stock portfolios). Another is using MOC orders to close intraday positions that have not reached a target price. And of course many hedge funds engage is far more exotic stuff. Just about any strategy needs to be considered in terms of position size, leverage and volatility of the instruments traded.

I'm sorry, but these issues are more complex, and there are far more available approaches to trading than sticking stops above or under candle formations.

 

[bolts]

Because believe it not a 1000 pip move is not that profitable. Euro moved about 1000 pips during 2006 which against dollar rates back then equates to about 2.2 pips day profit. So now you can see that even if you called the exact top or bottom and held for a year the profit is not very good. You might make 13% for the year if your carefully scaled into the trade.

Im closing this now as i can see you have no idea how to trade and its getting tiresome.

 

[moreliver]

Sorry gamma, for late response. Indeed, Jesse did something of the sort. I still wonder whether the Boy Plunger put out testers because he couldn't personally understand a market unless he was in it. He saw no value in paper trading either, apparently. So in lieu of stops (which he didn't use, as far as I can tell), he perhaps dipped a toe, keying into the stock price movements directly, and read from them what the price would likely do. And of course, if he got the right signals, he'd earn that nickname by plunging in with aggressive trading.

I have pondered this alternative to stop-loss discipline, but I don't really fancy it. Maybe if I spent as long as Jesse did watching the tape ...

 

[superfly]

[FONT=Verdana, Arial, Helvetica, sans-serif]Teach a highly educated person that it is not a disgrace to fail and that he must analyze every failure to find its cause. He must learn how to fail intelligently, for failing is one of the greatest arts in the world.[/FONT]
[FONT=Verdana, Arial, Helvetica, sans-serif]Charles F.Kettering[/FONT]

 

[charttrainerdotcom]

Hi guys, i guess its a good idea to take real examples of where to put the Stop Losses.

I just posted the Nas, Dow, EuroStoxx and Dax (5y, 3y, 1y, 6mon, 6 mon and 1 mon) charts and in some charts you can not only see but "feel" which lines should not break...

 

[Splitlink]

Are stop losses any good?
In my early days I would follow the norm which I believed was 30 points I would see my position turn against me hit my stop loss and go my way, After begining to think it was a personal issue the market wanted my money (yes this 1.3 trillion market was conspiring against little old me)
I raised my stop loss to 50 points and the market still cheated me
Raised it to 100 points and now all the banks, hedge funds and private investors got in on the action took my 100 points and then went the way I originally expected

Now I never trade before an economic-news event.
Do not set a stop loss
If I set my entry/exit parameters right it might go down 200 points but it will come back up and let me come out at B/E or a small loss.
I know people will say it depends on how deep your pockets are.
Not very deep really
I aim to make 25 to 30 points a day times my stake, I treat trading as a job
As I am sure a lot of us do
Expecting Realistic returns on your capital, dedication lot of hard work
And taking few knocks should make you more than the average u.k salary

But would like to hear others views and experiences with stop losses.

I was right in the middle of a serious look at my stop philosophy, yesterday, because there are one or two threads running, on the stop subject.

There was a big injection of Fed capital into the markets, yesterday. I was, also, having lunch. Without a stop of some sort, I would have lost a packet. I don't follow the news a great deal but was there any prior news indication before the event? I did not hear any and expected the market to go down. I was tranquil about that having opened an SP short position before the opening.

As far as that move was concerned, the closer my stop, the better! As it was I had decided to move it farther away , because of views that I had been reading on these threads.

The upshot was that it was not a good day for "wide stop" followers to prove a point!

Split

 

[Lee Shepherd]

As far as that move was concerned, the closer my stop, the better! As it was I had decided to move it farther away , because of views that I had been reading on these threads.

The upshot was that it was not a good day for "wide stop" followers to prove a point!

Split

What if you were long???

 

[theroguetrader]

Stops

Are stop losses any good?
In my early days I would follow the norm which I believed was 30 points I would see my position turn against me hit my stop loss and go my way, After begining to think it was a personal issue the market wanted my money (yes this 1.3 trillion market was conspiring against little old me)
I raised my stop loss to 50 points and the market still cheated me
Raised it to 100 points and now all the banks, hedge funds and private investors got in on the action took my 100 points and then went the way I originally expected

Now I never trade before an economic-news event.
Do not set a stop loss
If I set my entry/exit parameters right it might go down 200 points but it will come back up and let me come out at B/E or a small loss.
I know people will say it depends on how deep your pockets are.
Not very deep really
I aim to make 25 to 30 points a day times my stake, I treat trading as a job
As I am sure a lot of us do
Expecting Realistic returns on your capital, dedication lot of hard work
And taking few knocks should make you more than the average u.k salary

But would like to hear others views and experiences with stop losses.

hope ya dont mind me replying here - to whats a very interesting subject - when you say the " norm " which is like 30 points.. !!
what do you mean by that..?

 

[new_trader]

What if you were long???

A very good question and this is where many aspirants would be disheartened by the tight stop philosophy. I was long ESH8 and got stopped out not long before the market sky rocketed! The important thing to me is that my methodology is sound.