[WWWW]

Hard Stop Placement – The Great Contradiction?

Will a seasoned trader please…please advise here?

After 3 years of research and full time trading, I remain troubled (by apparently what continues to trouble even seasoned pros I am told).

Here’s the issue: We are told to set a hard stop, for example outside of a price channel or at a support level, etc. as a “hard stop. This is to supposedly allow the trade “enough room” to develop and prevent you from getting stopped out too soon.

YET – we are ALSO told by Pros – NEVER let price hit your hard stop but ‘manage the trade” – and get out sooner – at something far less than the “hard stop”. Again – “NEVER let it hit the stop you just placed at the most recent swing high or closest support level or channel line, or any place else your system "rule" told you to place it.”

So…won’t this result in premature exits? After all, if we never let it hit the hard stop, we are never giving the trade “the room it needs to go through it’s ups and downs”.

What are we to do? Use the “set a stop just outside the price channel” or just above the last most recent swing high” etc etc OR – do something else?

And yes - someone might respond that - it's whatever you are comfortable with...or...you must always manage your trade (of course!)...or there are no hard and fast rules....

The BUT is that there are Pros who make this a hard and fast rule, yet the wisdom of each of these rules are OPPOSITE. Unless I am just missing something.

Any specifics and guidance would be greatly appreciated. Thanks for your time and wisdom.

[Kiwi]

There is only a contradiction in that NEVER.

An initial stop should represent either your view of when the original premise is wrong or (better) when the probability of failure to stop suggests the stop should be. Everything in trading should really be probability based ... because any stop can be moved through and then back again.

Then, as a trade develops sometimes it will take out your stop. Other times you'll move forward inexorably towards a solid profit. Other times market behaviour will not match that expected by your setup and you exit early because probability now favours a larger loser if you don't get out now.

But there are no absolutes - there are only probabilities.

[SIUYA]

as with what Kiwi said.
Often a hard stop maybe used to say - this is the level I definitely know I am wrong and hence can price my position sizing on this, however, if the trade does not do what I think it will do I may stop myself out earlier than expected for a smaller loss.

However, depending on method, you ideally might need to have a mechanism that gets you back into the trade again should it look good again
This is often the catch - what if i miss the trade that makes the money?....Well that is why you might get out when the trade does not do what it you expected before your hard stop in order to lessen the loss, and probably allow you to go at it again should it start to become favorable.
Would you rather then times at a trade where you loose 10 pips or one time at it where you loose 100 pips?

plus have you ever heard the rule - I must let my stop get hit? (as opposed I am prepared to let my trade have room to breathe)

[Predictor]

First, many pros use a catastrophic stop which is a stop many times larger then what you would imagine -- in most cases. We read the tape and order flow and monitor the trade over time and exit before the stop is hit, in most cases

It is not uncommon for a trade that is exit in this way to actually work out. What I have seen is that trading in this way, using order flow, will tend to produce a more consistent ratio between the average win/loss versus using the largest stop possible.

Using the largest stop possible will produce greatest net return assuming one can consistently hit targets but it leaves one open to taking a larger tail risk

The edge is very small in active trading.. so giving up needless ticks by taking stop hits is costly

Originally Posted by WWWW »

Hard Stop Placement – The Great Contradiction?

Will a seasoned trader please…please advise here?

After 3 years of research and full time trading, I remain troubled (by apparently what continues to trouble even seasoned pros I am told).

Here’s the issue: We are told to set a hard stop, for example outside of a price channel or at a support level, etc. as a “hard stop. This is to supposedly allow the trade “enough room” to develop and prevent you from getting stopped out too soon.

YET – we are ALSO told by Pros – NEVER let price hit your hard stop but ‘manage the trade” – and get out sooner – at something far less than the “hard stop”. Again – “NEVER let it hit the stop you just placed at the most recent swing high or closest support level or channel line, or any place else your system "rule" told you to place it.”

So…won’t this result in premature exits? After all, if we never let it hit the hard stop, we are never giving the trade “the room it needs to go through it’s ups and downs”.

What are we to do? Use the “set a stop just outside the price channel” or just above the last most recent swing high” etc etc OR – do something else?

And yes - someone might respond that - it's whatever you are comfortable with...or...you must always manage your trade (of course!)...or there are no hard and fast rules....

The BUT is that there are Pros who make this a hard and fast rule, yet the wisdom of each of these rules are OPPOSITE. Unless I am just missing something.

Any specifics and guidance would be greatly appreciated. Thanks for your time and wisdom.

[Kiwi]

Originally Posted by Predictor »

The edge is very small in active trading.. so giving up needless ticks by taking stop hits is costly

For the OP ... note that there are two implicit assumptions in this statement that probably reflect the posters training method seeing he's a vendor.

1. the edge is very small
2. ticks to the stop are needless.

Think about the assumptions, deceptions, and pumping in posts that you read on TL. There are a hell of a lot of assumptions and, almost, a larger number of self-interested vendors on this site.

[MightyMouse]

I always use a stop and it is never mental. I use a stop as a risk management tool. My stop is assigned a max dollar amount that is pertinent only to me and is small in relation to my account and the amount of time I plan on being in a trade. My stop has nothing to do with being right or wrong. If I get stopped out, generally, the trade has a lot further to go before I am wrong about the trade and it frequently continues in the wrong direction without me in it, proving me wrong. Other times I will take lots of small losses and still end up being right and making a decent chunk of change on the trade. Ideally, I get in, do not get stopped out and the trade goes in my favor, but you can't always get what you want.

A mental stop allows the market to drain capital from my account while it decides if it is going to let me have it back. It's easier and more sensible for me to get out and get back in again at a worse or better price than to let the market have that much control over my money.

[steve46]

I have to agree with Kiwi and I certainly see why folks are critical of vendors...the problem from my point of view is that this makes it very difficult for those few who are trying to do something decent for new traders...

And Cyp (if you are reading my posts) now you can see what I was talking about in my response to your PM last night...

Best of luck to everyone

Steve

[steve46]

So I will post this to see if I can help out with respect to stops

The leftmost arrow shows where price tests and closes below a blue rectangle (a demand node)....for my system, if price continues we have a downtrending overnight market

Now what I do is to take the trade based on my criteria (the next arrow shows my entry)....and my stop is just below the previous low...for this market I have two (2) scenarios

in the first I take profits at 2, 3, 5, 7 and 10.....for the second scenario I take profit at 2, and 3 and I am prepared to get out there....generally because of a pending event (earnings report or economic report of some kind)..

I am willing to risk two points to get at least 2 and hopefully more points on each trade...I know what my expectation is, because I've done my research...from my point of view, it "costs me" 2 points (periodically) to win from 3 to 10...I know what the "frequency" should be (for me to win more than I lose)...and if that were to change....I would know within a few days....and then my job would be to figure out why....So far (over a period of more than a decade) I have only had to figure it out once....but it does happen.