Stop Selection

[gifropan 10]

One thing all traders have experienced is to have a trade get stopped out and then reverse and roar ahead in the intended direction. As a result of this experience some years ago I became an advocate of having very wide stops in the market. That worked for a while. Many a big loss turned into reasonable profits. But one or two looses became unbearable and so, I shelved the concept. I am interested to know what are TL members' thoughts on stop selection. Too close and you feed the markets sconstantly. Too far and you get a big hole in your account if they are hit a couple of times. Any ideas??

[Bear Mtn. 10]

First things first, when designing a stop strategy you have to bring yourself back to the notion of probabilities and that all we are working towards is trying to find an edge in this market - not an infallible solution. With that back in the forefront of your mind it is then hopefully possible to come up with rules for stop losses which focus on both controlling losses and allowing a suitable margin to keep good-trades running. Finding this balance is key, as the long, arbitrary stop is the friend of the 'holy-grail' trader who cannot bear a loss but will ultimately fail as they take too many huge hits in trying to find perfection in their trading plan. A perfect, save-every trade stop does not exist, but the trader who finds a stop strategy that truly suits their style and keeps their losses proportionally smaller than gains will always have a chance in the long run.

 

Where this stop lands is completely different depending on how you trade but I think it is just as important to have very clear rules and guides in your trading plan as to how you place a stop as to how you find an entry. There is no hard and fast rule to placing stops, just as there is no set rule for finding profitable entries - there are infinite ways to enter trades and just as many ways to manage them. It is down to your own strategy, how much risk you can accept and how you wish to trade. Gifro, you are quite right to highlight the horrible event of getting stopped just prior to the market moving as you had expected. I think the best way to handle that is simply to make sure you have the stop in the 'right' place according to your trading plan, at least the feeling of having done-all-you-could can only help you get ready for the next trading opportunity.

 

I had a very average day yesterday but it felt like a good one because on the road to my single, modest win my trade reversed to within ONE PIP of my stop - but held in. Now, this was not a particularly short stop BUT it was in the correct place - both by my trading rules and by the market and that made a small trade feel like a week-maker.

 

Look forward to hearing everyone's thoughts on this subject...

 

BM

[jonbig04 10]

I agree with Bear Mtn. There is no stop placement silver bullet. One thing you can do is wait for stop runs before entering. However, as you can imagine, you miss many trades this way. Another thing you can do is be extra careful during lunch hours.

 

However I think the most important part of entering is that your stop loss must be protected. I personally believe that this is more important than confirmation. Just my two-cents though.

 

Sometimes shit just happens.

[thalestrader 14]

"[L]et the market develop its own stop or 'signal' to get out." - Wyckoff, Studies in Tape Reading, Chapter IV, "Trading Rules."

 

I have neither seen nor heard better advice from anyone with respect to stop loss selection other than Wyckoff's advice to let the market develop its own stop, what I call "natural stops," or "natural stopping points."

 

I posted the attached chart of a GBPUSD trad opportunity on another thread here at TL. Here it is after the completion of the trade.

 

Best Wishes,

 

Thales