Setting "Proper" stops in trend strategy?

[Specterx]

Age old question but let me hear how you rationalize where proper stops should be set. Please keep in mind that this is for initial stop loss only, i.e. as soon as you get filled on your initiating order.

Few things to consider:

1. Do you have a fixed ticks stop loss? How do you determine what fixed ticks to use?
2. Do you use a dynamic stop loss based on volatility?
3. Do you just have a target vs stop setup (no in trade money-management)

Assuming you're talking about intraday...

I think the best is either an ATR based stop, or stop just outside the high/low you are trading off. In my experience if you're having lots of trades that run your stop a bit then turn around and head your way, and assuming the stops are reasonable to start (say not less than 1x ATR on avg), the proper response is to try and get better entries, or filter entries, versus trying to evade the problem by widening stops. It's relatively rare that I get barely clipped out on trades that turn around to work, and when I do, the stoprun usually sets up a second trade/entry.

If you place stops based on high/low you do need to have some controls in place to keep your R:R and targets reasonable, like a max allowable stop.

As to question 3, it really depends on what scale of move you're looking for. I think the idea of not doing any in-trade money management at all is sub-optimal, and at a certain point it becomes ridiculous to hold your original stop from a risk-reward perspective - e.g. you have a trade that's 19 points to a 20 point target, in which case holding the original 10 point stop would be risking 29 to make 1, which is nuts. But a simple mechanism (like an auto trail or auto breakeven after a given MFE) can help you keep R:R in line as the trade progresses without needing much or any attention from you.

 

[digitalnomad]

ATR is the gold standard but some other vol based indicator would do as well.

This is the right answer, but getting the math right is a different story. It takes a little mastery and realistic expectation. If you can beat the benchmark at least two-fold on average swing/overnight, and four-fold intraday, you're ahead of the game. For the record, I don't swing trade, though I do have a Long/Short portfolio. I like my sleep.

 

[nooby_mcnoob]

So, you give up 100% in purchase price (of your 'insurance'), rather than 'playing the odds' of a one&done SL? I've done this for investment positions, or for trades that were already troubled, but I've (somehow) never thought about the advantages of doing this as part of an ongoing trading strategy. (I was almost never long in the options market to begin with. )

So, if you "decided" that your loss-limit was $100, rather than place your stop where that would compute, you'd buy a spread ('spread' cuz I'm cheap) at the point where the long_position loss + the gain of the spread ≈-$100, and rather than having your stop get hit, you can hit {Pause} at that point, and evaluate what to do right then according to current conditions, right? If you're delta-matched, you'd only care about what happens from there.

Do I have that right?

Many many options with these options things....

That's the idea: give you a choice to accept the loss or not. With stop losses, you're out as soon as price hits. How many times do you see candles with crazy wicks as soon as you enter? I am tired of those circumstances. I've used this a couple of times in short term trades where I did not want to be caught on the wrong side for too long. A sort of bonus is once the trade goes in your way, you can keep the insurance around as a potential black swan.

 

[digitalnomad]

Many many options with these options things....

I despise long options, within a momentum trading framework, as they add complexity in the form of theta and vega. It's hard enough to manage risk without those two uncertainties. I'd rather hedge a portfolio with futures if possible. Selling premium, I have no experience with, but I do know most retail traders don't have the capital to implement a high yielding strategy.

You need to be this guy:

 

[digitalnomad]

I think the idea of not doing any in-trade money management at all is sub-optimal, and at a certain point it becomes ridiculous to hold your original stop from a risk-reward perspective.

Active management is a key ingredient to the recipe. Participants in the trading industry, who want to sit on their hands, get taken to the cleaners. Nothing wrong with that by the way, if you just buy the SPY periodically and go about your daily life.

 

[nooby_mcnoob]

I despise long options, within a momentum trading framework, as they add complexity in the form of theta and vega. It's hard enough to manage risk without those two uncertainties. I'd rather hedge a portfolio with futures if possible. Selling premium, I have no experience with, but I do know most retail traders don't have the capital to implement a high yielding strategy.

You need to be this guy:

Listening now. Smart guy, but VERY SIMPLE STRATEGY.

 

[schweiz]

I despise long options, within a momentum trading framework, as they add complexity in the form of theta and vega. It's hard enough to manage risk without those two uncertainties. I'd rather hedge a portfolio with futures if possible. Selling premium, I have no experience with, but I do know most retail traders don't have the capital to implement a high yielding strategy.

Don't tell this, you make the "option boys" smart; leave them in their wis(h)dom...

 

[speedo]

I knew a car dealer who used to say "There's an ass for every seat"....find your own seat.

 

[murray t turtle]

ATR20 is Average True Range averaged out over 20 bars - daily bars in my case. The range is the distance between the day's high and the day's low. ATR20 is a commonly used averaging period...........

%% Or 20 day moving average; i like a choice.
And if they pay dividends i take that into account even if they pay yearly; most do quarterly. Fixed tick would only make sense intraday; the few times i do intraday; i dont do fixed .Most all whipsaws on stuff i trade= main trend has changed= which is a great help/early warning.

 

[Visaria]

I tend to do fixed (but i change that amount to what i feel is appropriate) quite tight stops, with quite a few re -entries....