Stop-losses

[Bakinec]

Stop-losses, yay or nay?

Do you believe that stop-losses are necessary in any conditions, or only when conditions call for their use, such as when you need to leave the screen?

This is how a stop-loss works. You buy, you put a stop-loss below the price you bought, when the market drops down to the price where your stop-loss lies, and trades even ONLY ONE contract/share ONLY ONCE at that price, your stop-loss immediately becomes a market order and takes you out (sells at bid, at the moment when your stop-loss price becomes the current market bid-price). Vice-versa for when you sell.

A big guy needs to buy/sell only ONE SHARE/CONTRACT, only ONE TIME, at a certain price, to turn all the stops that are lying at that price into market orders.

What strategies/methods you use to avoid being taken out of the market, right before the market turns in your favor? Do you accept it as a fact of trading life and continue to use stops, perhaps increasing them and thus your risk, or do you avoid using stop-losses except when your attention needs to be away from the screen?

 

[cornix]

Yes to stop-losses and they are as small as I can make them.

No special strategy, if it gets hit, that's what it was there for. Good trade should go in your favour immediately or be out. That's the question of decent timing.

 

[Petsamo]

I'm a buy-low-sell-high trader. I rarely have used stop losses. I did not see the value of stop losses until I went into a chat room where the people buy-high-sell-low. They call it buy-high-sell-higher. They're succeeding in their approach, but in order to succeed, they have to set stop losses. They buy in areas where most are selling or sell in areas where most are buying, or covering shorts.

I voted yes even though I usually don't use stop losses.

 

[NoDoji]

Quote from Gubinec:

A big guy needs to buy/sell only ONE SHARE/CONTRACT, only ONE TIME, at a certain price, to turn all the stops that are lying at that price into market orders.

What strategies/methods you use to avoid being taken out of the market, right before the market turns in your favor? Do you accept it as a fact of trading life and continue to use stops, perhaps increasing them and thus your risk, or do you avoid using stop-losses except when your attention needs to be away from the screen?

Anyone can buy/sell that one share/one contract at a certain price to turn all stops there into market orders, not just a "big guy". I found that these head fakes occur most often a) during the periods of low volume consolidation following volatility, and b) in a counter-trend environment.

Since you have no way of knowing in advance whether a breach of a level will turn out to be a stop run or a true breakout, there are two ways I know of to avoid being taken out of the market only to see it turn in your favor. One is, as you said, to place a stop at level further away. The other is to skip the initial trade entry, wait for price to revisit your initial entry area and if there's a head fake and price comes right back to the price you initially wanted to put on the trade, go for it. I call that the "second mouse" entry. On a second mouse entry, price should immediately go in your favor with conviction. If not, it's probably entering a period of range/chop and it's best to scratch the trade and re-evaluate the price action.

The reason price should run in your favor quickly on a second mouse entry is because those who entered positions on the first price trigger and placed stops just outside the key level are pissed that they were stopped out by a few ticks and they'll chase price to get back in, and those who entered positions in the opposite direction when buy/sell stops triggered the entry, will have THEIR protective stops triggered at the next S/R level.

In my own experience, placing stops further away because I have an opinion about where price will and won't go, produced larger losses more often than it kept me out of head fake moves.

Cornix and I trade just about identically, and because of the way we trade, tight stops make sense.

 

[Bakinec]

As always, a top-quality post, ND! Great strategy as well, thanks for sharing

 

[intradaybill]

Quote from Gubinec:

What strategies/methods you use to avoid being taken out of the market, right before the market turns in your favor? Do you accept it as a fact of trading life and continue to use stops, perhaps increasing them and thus your risk, or do you avoid using stop-losses except when your attention needs to be away from the screen?

The startegy is to have a sufficient win rate for your R:R. If you start warrying about price hitting your stop and then reversing you will go crazy. This is what newbies do. Experienced traders know their win rate. They do not care even if the stop is hit exactly and then the market reverses and rallies. They have already a new signal at that point that will make up the loss and a profit on top of that.

 

[NoDoji]

Quote from intradaybill:

The startegy is to have a sufficient win rate for your R:R. If you start warrying about price hitting your stop and then reversing you will go crazy. This is what newbies do. Experienced traders know their win rate. They do not care even if the stop is hit exactly and then the market reverses and rallies. They have already a new signal at that point that will make up the loss and a profit on top of that.

Excellent excellent post! Until you get to the point that you trade this way (Mark Douglas' "trader's mindset"), you have no idea how effective it is. I used to walk away in frustration when this happened to me, then come back to see that I missed a really great trade ("Damn it, stopped out to the tick and then it did exactly what I thought it would do in the first place!"). Now I have a moment of grumpiness when I sell a low tick or buy a high tick, but I realize that a strong confirmed setup is likely just around the corner because of that head-fake move I fell for and I often catch my best trade of the day out of it.

 

[the1]

The only stop loss I use is a disaster stop loss. I refuse to let the market dictate when and how I lose money. That's my job. To use this method you have to have a very high degree of discipline.

 

[athlonmank8]

YES but you cannot wing it. You need to have a good spot for them otherwise there's not much of an edge.

 

[covered_call]

Tight stops keep you in the market longer when you think about it. Not using stops, or using loose stops, will drain your your account faster. Enter the market, place your stop and profit orders and don't worry about it. Focus on your next trade. This one is done.