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Master the Art of Stop Loss Placement

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Understanding where to place your stops is an important skill in trading. Many new traders do not place importance on this and will usually place stops at the most obvious locations. New traders also like to place stops at a fixed amount no matter what the setup. Each setup requires a different risk parameter.


I base my stops according to my entry. Since I am a pivot based trader, alll my stops will be placed above or below the pivot line. However, ff you entry is based on a indicator signal your stop should be based when your indicator proves you wrong. One mistake I see with new traders is that they will place their stop 1-2 S&P points after a buy/sell signal. If you entry was not based on price action, you are not using a smart stop. Price can drop to your stop loss level without your indicators confirming it. This is a sure way to lose.


Tape readers are able to use a tighter stop. This is because they clearly see short-term support/resistance levels on the tape. Most new traders do not understand tape reading. This skill takes months to years to learn. Yet, new traders attempt to scalp placing 30-40 roundtrips a day. This is not the way to learn successful trading.


Trailing stops

Once a trade moves in your favor, it is wise to move stops to protect profits. However, trailing stops by a fixed percentage or points is not the greatest way to manage your position. I use what are called "smart stops". As a trade moves in my favor, my rule for stop placement is automatic. After 10 dow mini points, I move my stop to breakeven. I will also scale out half at +10 and a quarter at +20. The last quarter position is the portion I manage. When price breaks a pivot line, I will move my stop below the pivot. All of my stops are based on price levels. Once price breaks that level, I will move my stop. I also combine fibonacci levels and pivots to find good stop placement levels. This gives room for the trade to work out.


Wins must be greater than losses. Managing a winning position is crucial in trading success.


Good luck and best of trading.




James Lee

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Questions that must be answered when writing your trading rules


  • What if your stop is the perfect entry point in direction of your original order? In other words you got stopped out at exactly the wrong place; your original trend analyis was correct, just slightly off. Your original trend analysis would have been correct in most instances, but this is one of those times when the price continues past a typical reversal or continuation point.

  • In this case, averaging in would be better than getting stopped out at a loss. But how do you know the difference? Is this dangerous? How much risk should I increase?

  • How much should a person average in? Should you increase your position to the maximum in order to offset the original loss?

  • What if your stop loss is the price you should reverse at?

  • Even if your entry is totally wrong, should you average in, looking for a slight bounce in the right direction to minimize you losses?


To deal with all of these questions, you must define what a total break down of an entry signal is, and what a slight misjudgment in the entry signal is. Determining what factors affect a trend reversal or continuation is critical. News is an obvious and typical influence on price and indicators. I have never seen an indicator that can retrieve, analyze and interpret the news for you. That is one influence that could invalidate a typically good trade entry signal.


Every person uses different trade set ups and different indicators, so you must determine for yourself what causes a failure of an otherwise good trade signal. The determining factors are probably very subtle, and difficult to notice in a timely manner.


One example is a very fast and substantial price move. A surge in price can come at the beginning of a trend, or at the end of a trend, or at the continuation of a trend. So if a price surge happens, which one of those three is it? How does that affect your stop, and your decision to reverse, or reenter an order in the previous direction? This is something you need to determine in your trading rules.


If people have ideas and/or experiences about what the specific answers are for your trade rules and indicators, please post them.

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Stop losses must be out of the way as drop dead stops.


Exiting on a mechanical stop is the road to losses. Stops should be dynamic and be related to your trade location and you should exit when the market tells you that the outcome of the trade you entered is no longer has a high enough probabiility. To do this you must have a trade structure within which you trade.

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Exiting on a mechanical stop is the road to losses.


I agree. The worse thing that can happen, is that your stop losses become "loss targets". Which can easily happen if the stop loss is not being adjusted, or we just ignore the signs that a mistake was made. When I start thinking to myself, "I would like to cut my losses at X", then bad things happen. If I accept that I just need to take the loss now, and deal with it, then I usually minimize the pain. Actually I shouldn't be thinking of it in terms of pain or profit. That's when logic ceases to operate. If I'm trying to keep track of how much money I'm making or loosing, or whether I'm feeling good or bad about the current situation, then it interferes with my ability to make a decision. That's the psychological and emotional side of the stop loss decision.

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