FTSE Beater
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Stop-losses
Hi all
This really ties in with the last section on risk and reward. Knowing where to place a stop, is one of the hardest things to know. There are so many factors that come into play. Things like the volatility of the instrument that your trading, your risk tolerance..etc
Stop-losses are an important part of trading. I’ve said it before, when your learning to trade, the important thing is that you “stay in the game” long enough to put what you have learnt to good use. Stop-losses save you money, they don’t make you money. There will be many times as a trader, your stop gets hit, and your closed out of a trade only to look back later to find that you would have made an absolute fortune. This happens in trading, and it is time like that where you must remember that the stop loss is there to protect your capital.
The point at which you are incorrect.
The general acceptance is that your stop is placed at the point at which you are told that you were incorrect. Most of the time it will be a break in a trendline, or a point of support / resistance that got broken.
With this example of SDRC, the support was at 450, and the natural place for the stop-loss was about 445. The support failed, the stop got hit and the price carried on lower. At 445 the price has violated the support line, so you would expect the price to fall futher, which is what happened in this case.
The trader versus the market makers
The unfortunate matter is that the market makers know where the stops are. They know because most people trade the same way. There are plenty of occasions when a market maker will go “gunning” for stops. What I mean by this is that they drop the price below support, to get the stops hit and then the price carries up, up and away.
This GKN chart shows how the price fell below support at 197, hit 195 and then reversed. If you had placed a tight stop at 196, you would have been stopped out.
The only way to combat this is to allow the price a bit of room to move once the support / resistance / trendline has been broken, that way any stops that get gunned won’t be yours. How much you let the price move around is down to personal preference, but YOU MUST KNOW THE POSITION OF YOUR STOP BEFORE YOUR ENTRY, this includes the room for manoeuvre, and should be part of the risk calculation that we talked about earlier.
Mid-trade stop-losses.
In the risk and reward post, I talked about moving the stop-loss so that at any point in the trade, the risk does not exceed the reward. Moving your stop during a trade must only be used to lock in profits. If you move the stop loss to increase your risk, you are asking for trouble.
Moving a stop to protect your profits, should be placed under the last support for a buy or last resistance for a short. On a end of day chart you might look for the last low to act as the support, or the last high as the resistance, for example.
If we entry this Corus trade, short at 59, with a stop-loss at 64 and a price target of 45.
Risk = 5
Reward = 14
Reward / Risk ratio = 2.8:1
Now if the chart does this…..
At the current price of 52, and leaving the stop where it is, we would have this scenario
Risk = 12
Reward = 7
Reward / Risk ratio = 1:1.7
At this point we have more risk than reward. So the logical place to put the stop is at 57, as this is the last significant high, giving…..
Risk = 5
Reward = 7
Reward / Risk ratio = 1.4:1
Which is better than the 1:1.7 ratio.
Moving stop-losses to protect profits is just that, taking the profits that are on offer.
Stop loss placement is difficult and takes time to master, but as long as you remember the fact that stop-losses protect your capital, the emotional side of trading should be easier to follow.
For this week, I want you to image that you are in the following trades, where you think the stop-loss will be and a rough target. For all of the charts, we’ll be looking at the EOD chart, over the last 6 months.
<table border="1"> <tr><td>No.</td><td>Ticker</td><td>Name</td><td>Long/Short</td><td>www.ADVFN.com Link</td></tr> <tr><td>1</td><td>BSY</td><td>BskyB</td><td>Short</td><td>http://www.advfn.com/cmn/chrt/chrt_...0&ind1_2=&ind2_2=&ind_type3=0&ind1_3=&ind2_3=</td></tr> <tr><td>2</td><td>CBRY</td><td>Cadbury </td><td>Long</td><td>http://www.advfn.com/cmn/chrt/chrt_...0&ind1_2=&ind2_2=&ind_type3=0&ind1_3=&ind2_3=</td></tr> <tr><td>3</td><td>FP.</td><td>Friends Provident</td><td>Short</td><td>http://www.advfn.com/cmn/chrt/chrt_...0&ind1_2=&ind2_2=&ind_type3=0&ind1_3=&ind2_3=</td></tr> <tr><td>4</td><td>GKN</td><td>GKN</td><td>Long</td><td>http://www.advfn.com/cmn/chrt/chrt_...0&ind1_2=&ind2_2=&ind_type3=0&ind1_3=&ind2_3=</td></tr> <tr><td>5</td><td>VOD</td><td>Vodafone</td><td>Long</td><td>http://www.advfn.com/cmn/chrt/chrt_...0&ind1_2=&ind2_2=&ind_type3=0&ind1_3=&ind2_3=</td></tr> </table>
As always there is no right or wrong answers and I would love to hear from you.
Take care,
Hi all
This really ties in with the last section on risk and reward. Knowing where to place a stop, is one of the hardest things to know. There are so many factors that come into play. Things like the volatility of the instrument that your trading, your risk tolerance..etc
Stop-losses are an important part of trading. I’ve said it before, when your learning to trade, the important thing is that you “stay in the game” long enough to put what you have learnt to good use. Stop-losses save you money, they don’t make you money. There will be many times as a trader, your stop gets hit, and your closed out of a trade only to look back later to find that you would have made an absolute fortune. This happens in trading, and it is time like that where you must remember that the stop loss is there to protect your capital.
The point at which you are incorrect.
The general acceptance is that your stop is placed at the point at which you are told that you were incorrect. Most of the time it will be a break in a trendline, or a point of support / resistance that got broken.
With this example of SDRC, the support was at 450, and the natural place for the stop-loss was about 445. The support failed, the stop got hit and the price carried on lower. At 445 the price has violated the support line, so you would expect the price to fall futher, which is what happened in this case.
The trader versus the market makers
The unfortunate matter is that the market makers know where the stops are. They know because most people trade the same way. There are plenty of occasions when a market maker will go “gunning” for stops. What I mean by this is that they drop the price below support, to get the stops hit and then the price carries up, up and away.
This GKN chart shows how the price fell below support at 197, hit 195 and then reversed. If you had placed a tight stop at 196, you would have been stopped out.
The only way to combat this is to allow the price a bit of room to move once the support / resistance / trendline has been broken, that way any stops that get gunned won’t be yours. How much you let the price move around is down to personal preference, but YOU MUST KNOW THE POSITION OF YOUR STOP BEFORE YOUR ENTRY, this includes the room for manoeuvre, and should be part of the risk calculation that we talked about earlier.
Mid-trade stop-losses.
In the risk and reward post, I talked about moving the stop-loss so that at any point in the trade, the risk does not exceed the reward. Moving your stop during a trade must only be used to lock in profits. If you move the stop loss to increase your risk, you are asking for trouble.
Moving a stop to protect your profits, should be placed under the last support for a buy or last resistance for a short. On a end of day chart you might look for the last low to act as the support, or the last high as the resistance, for example.
If we entry this Corus trade, short at 59, with a stop-loss at 64 and a price target of 45.
Risk = 5
Reward = 14
Reward / Risk ratio = 2.8:1
Now if the chart does this…..
At the current price of 52, and leaving the stop where it is, we would have this scenario
Risk = 12
Reward = 7
Reward / Risk ratio = 1:1.7
At this point we have more risk than reward. So the logical place to put the stop is at 57, as this is the last significant high, giving…..
Risk = 5
Reward = 7
Reward / Risk ratio = 1.4:1
Which is better than the 1:1.7 ratio.
Moving stop-losses to protect profits is just that, taking the profits that are on offer.
Stop loss placement is difficult and takes time to master, but as long as you remember the fact that stop-losses protect your capital, the emotional side of trading should be easier to follow.
For this week, I want you to image that you are in the following trades, where you think the stop-loss will be and a rough target. For all of the charts, we’ll be looking at the EOD chart, over the last 6 months.
<table border="1"> <tr><td>No.</td><td>Ticker</td><td>Name</td><td>Long/Short</td><td>www.ADVFN.com Link</td></tr> <tr><td>1</td><td>BSY</td><td>BskyB</td><td>Short</td><td>http://www.advfn.com/cmn/chrt/chrt_...0&ind1_2=&ind2_2=&ind_type3=0&ind1_3=&ind2_3=</td></tr> <tr><td>2</td><td>CBRY</td><td>Cadbury </td><td>Long</td><td>http://www.advfn.com/cmn/chrt/chrt_...0&ind1_2=&ind2_2=&ind_type3=0&ind1_3=&ind2_3=</td></tr> <tr><td>3</td><td>FP.</td><td>Friends Provident</td><td>Short</td><td>http://www.advfn.com/cmn/chrt/chrt_...0&ind1_2=&ind2_2=&ind_type3=0&ind1_3=&ind2_3=</td></tr> <tr><td>4</td><td>GKN</td><td>GKN</td><td>Long</td><td>http://www.advfn.com/cmn/chrt/chrt_...0&ind1_2=&ind2_2=&ind_type3=0&ind1_3=&ind2_3=</td></tr> <tr><td>5</td><td>VOD</td><td>Vodafone</td><td>Long</td><td>http://www.advfn.com/cmn/chrt/chrt_...0&ind1_2=&ind2_2=&ind_type3=0&ind1_3=&ind2_3=</td></tr> </table>
As always there is no right or wrong answers and I would love to hear from you.
Take care,