Hard Stops vs Mental Stops

[NoDoji]

Quote from oraclewizard77:

I am curious about your risk vs reward. Do you have an equal stop vs profit target, or is it based more on the chart, or is it standard.

Quote from 1prometheus:

Many traders exit trades because they have been told to "use stops" , with no other supporting logic. For example many have a blanket rule, "I use a 2 point stop" or whatever. The effect of this is that they end up exiting trades that if they were not in the market, they would be looking to enter rather than exit. This is not logical.

I'll address both these posts at once. I try to keep my minimum R:R on a trade at 1:2. If I put on a with-trend trade, I expect at least $300 per contract profit and my max loss is $150. On a counter-trend trade, I expect a minimum $200 per contract profit and the vast majority of those trades have a stop of $80-$100 loss. I will sometimes counter-trend with the max stop, but the R:R is still positive. Very often my profit is more than 3 times my initial stop loss.

I use a fixed stop, based on months of tedious analysis demonstrating that no profitable trade has ever run that fixed amount against me. Only losing trades have hit that level (or more) of heat. There are cases where if I placed a much larger stop I would be kept in what would eventually become a profitable trade, but my analysis demonstrated that I can easily recover from two of my max fixed stop losses with one average profitable trade.

If a trade setup indicates a survivable stop loss would have to be more than my fixed amount, I will skip that trade and look for a re-entry point on a smaller time frame chart that allows me to place a survivable stop that fits my R:R parameter.

 

[1prometheus]

"I use a fixed stop, based on months of tedious analysis demonstrating that no profitable trade has ever run that fixed amount against me. Only losing trades have hit that level (or more) of heat. There are cases where if I placed a much larger stop I would be kept in what would eventually become a profitable trade, but my analysis demonstrated that I can easily recover from two of my max fixed stop losses with one average profitable trade. "

What you are saying is that you use a method of exiting trades based on your view of forward expectation, which is 100% consent with the viewpoint I expressed.

 

[NoDoji]

Quote from 1prometheus:

What you are saying is that you use a method of exiting trades based on your view of forward expectation, which is 100% consent with the viewpoint I expressed.

I think my view is somewhat different because you stated, "Many traders exit trades because they have been told to "use stops", with no other supporting logic."

Although I use a fixed max stop (my stop can vary, but is never more than $150/contract), I have supporting logic in that my stops must be survivable.

Say, for example, I want to join an uptrend on a pullback, using price action to take me into the trade at the point that the "counter-trend" pullback reverses and renewed strength is asserted for the next leg up.

If the price at which renewed strength is asserted means that a survivable stop (placed below the pivot low of the pullback) would be more than $150/contract, I will choose a different tactic for entering the trend, such as buying the breakout of previous resistance. Yes, this means my entry price might be significantly worse than if I took the pullback reversal entry, but the fact that buying strength is fully asserted at the breakout point means my odds of a profitable trade have improved significantly (more positive expectancy) and I can put on that that trade with a much tighter stop (lower risk).

This has been one of the most beneficial concepts I've learned so far.

 

[No.Heat]

Quote from NoDoji:

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I will choose a different tactic for entering the trend, such as buying the breakout of previous resistance. Yes, this means my entry price might be significantly worse than if I took the pullback reversal entry, but the fact that buying strength is fully asserted at the breakout point means my odds of a profitable trade have improved significantly (more positive expectancy) and I can put on that that trade with a much tighter stop (lower risk).

This has been one of the most beneficial concepts I've learned so far.

Buying high or buying intro strength reduces your reward, not exactly my of cup tea when trading the markets.

I prefer to enter using some sort of counter trend entry in another fractal because these are the entries that offer no heat and allow me to load up on size due to micro stops. Lot of games are played around the breakout areas.

 

[jones247]

Excellent point...

Quote from NoDoji:

Say, for example, I want to join an uptrend on a pullback, using price action to take me into the trade at the point that the "counter-trend" pullback reverses and renewed strength is asserted for the next leg up.

If the price at which renewed strength is asserted means that a survivable stop (placed below the pivot low of the pullback) would be more than $150/contract, I will choose a different tactic for entering the trend, such as buying the breakout of previous resistance. Yes, this means my entry price might be significantly worse than if I took the pullback reversal entry, but the fact that buying strength is fully asserted at the breakout point means my odds of a profitable trade have improved significantly (more positive expectancy) and I can put on that that trade with a much tighter stop (lower risk).

This has been one of the most beneficial concepts I've learned so far.

 

[NoDoji]

Quote from No.Heat:

Buying high or buying intro strength reduces your reward, not exactly my of cup tea when trading the markets.

These are the fastest, easiest, lowest risk, no-heat trades I take. I believe out of all the breakout trades I've taken this year, only three of them failed, I was able to exit two of them b/e and I sat on one for the loss because I couldn't believe it had actually failed

Quote from No.Heat:

I prefer to enter using some sort of counter trend entry in another fractal because these are the entries that offer no heat and allow me to load up on size due to micro stops. Lot of games are played around the breakout areas.

I also like counter-trend trades in specific price environments, and I too will sometimes load up because of the ridiculously small stops that can be put in when you get the timing just right.

Nice thing about breakouts, though, is there's no timing required. You can have the buy or sell stop placed well in advance and when price gets there, you're among the first in line to be filled, giving you a quick b/e exit if it fails.

 

[Nexen]

Quote from NoDoji:

These are the fastest, easiest, lowest risk, no-heat trades I take. I believe out of all the breakout trades I've taken this year, only three of them failed, I was able to exit two of them b/e and I sat on one for the loss because I couldn't believe it had actually failed

Nice thing about breakouts, though, is there's no timing required. You can have the buy or sell stop placed well in advance and when price gets there, you're among the first in line to be filled, giving you a quick b/e exit if it fails.

Any chance you could post a bearish and a bullish sample of these breakout trades ? It would really help understand what you describe with some visuals.

Thank you.

 

[NoDoji]

Quote from Nexen:

Any chance you could post a bearish and a bullish sample of these breakout trades ? It would really help understand what you describe with some visuals.

Thank you.

Yes, here are two of my Friday trades. One was where I sold 1 tick below the low of day at that point (bearish) and the later one I bought 1 tick above an internal resistance level (bullish).

 

[lukas]

Bringing up the old thread - to those not using hard stops: what do you do when your connection is lost? Also, what do you think about averaging down?

 

[Xela]

Bringing up the old thread

Thanks - always a pleasure to find a previously unread NoDoji thread.

to those not using hard stops: what do you do when your connection is lost?

It's the "key question".

As plenty of people who have ever had a momentary internet outage, disconnection or sudden computer problem will now attest to, it costs nothing to enter at least a "disaster-stop" automatically, with every trade.