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  1. A stop that is not entered cannot be hit. Those nine words, while absolutely true, cost me a mountain of money back when I was a rosy-cheeked youngster who was about to set the trading world on fire and rip the market a new one. After numerous painful 'setbacks' - to put it diplomatically - I discovered another, much more profitable truth: taking small losses is the cost of doing business in the world of professional trading. I know what you're thinking: another 'cut losses short and let winners run' article...thanks Captain Obvious. I concur; money management and preservation of capital are the most boring topics in the trading universe. So I'll assume that anyone reading past this point uses stop loss orders and is mainly interested in how to optimize them. First, a quick clarification. The stops I'm discussing aren't the ones that some traders enter before a new trade is filled 'just in case'...just in case the power goes out or the internet/computer goes down before they can get their initial stop order in. I'm strictly speaking of initial and trailing stops and the most profitable spots to place them using price bars. The initial stop loss is entered as soon as you're executed on a new trade. If the trade goes against you, you're stopped out at that price and it's on to the next set up. If the trade works in your favor, the intial stop becomes a trailing stop and the price is moved along to protect profits. Bars, Swings and Trends If successive bars are making higher highs and higher lows, that's an upswing. If successive bars are making lower highs and lower lows, that's a downswing. When successive swings are compared, if they are in a pattern of higher highs and higher lows (or lower highs and lower lows), that is deemed an uptrend (downtrend). With those definitions out of the way, using price bars to set stops is pretty simple. In an uptrend, the market is making higher swing highs and higher swing lows. Within the upswings, the individual price bars themselves are typically up bars. The idea is to set the stop loss order under the lows of the up bars in an upswing, because if the pattern of up bars is broken, it's not going up any more. In a downtrend, the market is making lower swing highs and lower swing lows. Within the downswings, the individual price bars are typically down bars. The idea here is to set the stop loss order above the highs of the down bars in a downswing, for if the pattern of down bars is broken, it's not going down any more. Dropping Down Finally, we get to the part about saving ticks and increasing profits. Setting the initial stop order can't really be tweaked all that much. I hate to be the one to tell you, but you're always going to have a small percentage of your trades get stopped out by a tick or two and then reverse and go to target without you. It's one of those cost of doing business things and it's inescapable. You just have to set the initial stop order as illustrated above and take what comes.The good news is that once the position moves into profitability, there are tricks of the trade, so to speak, that will add to the bottom line. Dropping down to the next smallest time frame on your chart instantly increases profits by getting you out of your winning trades without leaving as much on the table. If you're trading off the 1 hour chart, click it down to 30-minutes. If you're a 5-minute bar player, down to 3-minute, and so on. The pattern of higher or lower swings will be broken sooner on the smaller time frame and save you a few ticks in getting out. This also allows you to ignore inside bars as far as moving your stop, without increasing your risk. Expanded Range I'd be remiss if I didn't touch on my experience with expanded range bars as they pertain to stops. Using whatever measure you'd like; be it an indicator like ATR (Average True Range) or a ruler held up to your screen; when you are in the midst of a profitable trade and trailing your stop along and a bar starts forming that is significantly larger than normal, tighten that stop. This is usually a sign that the move in your direction is over, at least temporarily, and you might as well take all you can rather than letting it come all the way back to your stop. You can always get back in.
  2. I chanced upon this rather interesting blog, would be interested to hear other members opinion. http://andihammer.com/stops-or-not-to-stop-that-is-the-question/
  3. I had a wild ride in June: balance opened with 2 big gains. Because I was mostly shorting stocks, a week of rising markets plunged me back to break even for the year. Then, finally, blessedly, groking that the markets had turned, I closed shorts and bot long. Barely ended the month with a gain on 4 days of gains. On reflection, I saw that having stops or limits on my orders would have preserved over $1000 of my balance. So, I asked myself, what's behind *not" using these tools? One experience came to mind immediately: trading the market w/o S&L feels "freeer" and more "masterly." S&Ls feel like training wheels! I had some success with S&Ls long ago when I knew I was going to away from daily attention to markets and wanted my holdings to stop out in case the market dropped. That is indeed what the markets did, and I was very happy to have put in those stops while away. My experience with training wheels is that were am annoyance and symbol of many things wrong with my relationship with my dad. When I was 5 or 6, as the first born child, he bought me a bike that fit him! Rather than getting a smaller one, I literally had to grow up to 11 or 12 to be larger enough to ride it. I had brothers (with smaller, kid-sized bikes) riding 2-wheels before I did. I vividly remember the day of no return when I took off those training wheels and mastered the #$^$ thing! Even today, 40 odd years later, I can feel the heat of the blushing and shame (?) that I was that big and old and could not ride. So, clearly, this metaphor doesn't help. I have several options, one of which is to find a therapist and work this thing through. Another, and faster-cheaper option is to change the metaphor. Some come to mind: S&Ls are ... Nets, like those used by high-wire acts. Life preservers, like those worn when white water rafting Air bags, like those that deploy when cars hit things I might work with these. Don't feel any blushing, shame. I WANT to use a life preserver on a white water adventure! I like this one best of the three, also, because rafting is a mix of turbulence I navigate with my actions (some skillful, some not). Should the preserver be needed, it ought to help me stay alive so I can take another trip. Thanks for reading. This has helped. Feng
  4. I want to share a technique that can help you to choose your desired winning frequency before you enter into a trade. I would guess a larger number of retail traders don't lose because they are wrong but because they use stops improperly and lose money even when they're right. Assume for these purposes that the market is mostly random, if true then that means that an X point move up or down has little value in determining what the market will do next because, of course, if it did have value then we could use that predict it. Now, it is true that I predict the market but I will agree that the market is mostly random to most people most of the time. This implies we can determine our win frequency before entering a trade simply by choosing a stop and target of the appropriate size. The expected profit must be zero. The formula is: WIN AMOUNT * WIN FREQUENCY – LOSS AMOUNT * LOSS FREQUENCY = 0 Examples: +5 and -5 point target and stop will win 50% by random chance +5 and -15 point target and stop will win 75% by random chance +5 and -20 point target and stop will win 80% by random chance Formula examples: 5*W-5*(1-W) = 0 5W – 5 + 5W = 0 10W = 5, W = ½, W = .5 5*W-20(1-W) =0 5W -20 + 20W =0 25W = 20 W = 20/25 = .8 If these are challenging, you can use the equation solver at http://www.algebrahelp.com/calculators/equation/ You can choose any winning ratio that you desire using this method. I personally would feel quite comfortable with 65% to 80% win ratio. Of course, your profit expectation is still going to be zero unless you have an edge. My point is that many people may have a slight 2% to 5% edge but ruin it with poor stops. It is very easy to erode such a small edge with a poor stop. The goal is to use the mathematics of randomness to prevent that. While the expectation is the true measure of a system, if one chooses a system with a very low win rate then by random chance they could experience a very long streak of losers. Psychologically this will be difficult for many to work through. I have, also found that when win rates drop below around 55% that the resultant equity curves become rather unstable. It is worth to consider the assumptions in which choosing a higher win rate would work better then not. If our model is such that we can predict that the market will move in a given direction more times then not then choosing a higher win rate should be beneficial. However, if our ability is more about predicting the larger movements then we may want to choose a lower risk and a higher reward payoff. This is an updated authorized partial excerpt from My Favorite Edges Bonus. Chapter "Choose Your Win Rate". ---- Curtis
  5. I personally do not use stop losses instead i manage my position (however i typically have a 10 point crash stop which i have yet to take once). I think this is a big fallacy in the industry and one of the reason why over 90% fail ... just wanted to hear everyone thoughts....
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