Stops

[stkcowboy]

for the moment let's assume 3 to 1 ratio, and for discussion sake we decide on 5 pts as the stop. From experience I find that I always lose the 5 pts on an adverse move; even if it moves down only 6 then reverses to up whatever. However on a favorable move the instrument doesn't necessarily go up 15 pts all at once without a wiggle or two, and more often than not will only go up 10 or 12 before reversing down. How many of you move your stop up so that it is only/always 5 pts from current price and capture some profit? Or is it an all or nothing game, i.e. your p&l will have many 5 pt losses and the rest 15pts or more?

What I'm getting into here is the psychology of watching a partial profit evaporate versus interceding and ringing the register at times. Just curious how experienced traders handle this aspect of trading.

 

[corvus]

What about an ATR-based stop? Seems like when the market is more volatile, like Friday morning, the ATR was around 4...a > 4 point stop (say 4.5) seemed like a decent indicator of failure, but otherwise it's just noise. Later in the day, when the volume was negligible and the ATR was around 2, a > 2 point stop would have been pretty decent.

Guess it is highly dependent on your strategy, but seems like you could use ATR to separate the noise from a real movement against you.

 

[jficquette]

What is your profit objective when you get into a trade?.

Generally speaking, the longer the time frame is better. The smaller the time frame the more chaos you deal with. There is an misconception that the smaller the time frame the better you control your loss. That is not true. You will be more successful the longer the time frame that you trade in. This assumes you have precise rules for entry, profit taking and stops. Without rules it is pretty much hopeless.

John

 

[candletrader]

Originally posted by Breakout




I usually risk 6 to 7 ticks at most. Why? Because I have
to average a 3 to 1 ratio to survive.

If you use a 3 or 4 handle stop you have to make

9 to 12 handles.

Some people feel a 2 to 1 ratio is all that is needed, but
myself and many others feel 3 to 1 is best.

How about a 1 to 1 ratio with an 80%+ success rate?

... the point being that the success rate is inversely proportional to the reward:risk ratio... it boils down to personality as to what you prefer, a high success rate with small gains per trade, or a lower success rate with higher gains on the winning trades... a 1:1 reward:risk ratio can be just as good as a 3:1 reward:risk ratio....

 

[Breakout]

Originally posted by stkcowboy
for the moment let's assume 3 to 1 ratio, and for discussion sake we decide on 5 pts as the stop. From experience I find that I always lose the 5 pts on an adverse move; even if it moves down only 6 then reverses to up whatever. However on a favorable move the instrument doesn't necessarily go up 15 pts all at once without a wiggle or two, and more often than not will only go up 10 or 12 before reversing down. How many of you move your stop up so that it is only/always 5 pts from current price and capture some profit? Or is it an all or nothing game, i.e. your p&l will have many 5 pt losses and the rest 15pts or more?

What I'm getting into here is the psychology of watching a partial profit evaporate versus interceding and ringing the register at times. Just curious how experienced traders handle this aspect of trading.

Good question...this may not be for everybody, but this is how I do it.


Lets say I put on a trade(ES mini) and I'm long at 800.00.

Lets say my initial stop is 798.00 ( 2 pts)

If the market goes to 802.00, I raise my stop
to 800.25. (breakeven plus 1 tick to cover commish)

If it goes to 803.00, I raise my stop to 801.50

If it goes to 804.00, I raise the stop to 802.50

In other words, I trail my stop about 6 ticks until
I'm either stopped out or reach my profit
objective which is 806.00 (a 3 to 1 trade)

If I reach 806.00, I ring the register and start looking for
another trade.

Hope this helps

 

[Breakout]

Originally posted by candletrader



How about a 1 to 1 ratio with an 80%+ success rate?

... the point being that the success rate is inversely proportional to the reward:risk ratio... it boils down to personality as to what you prefer, a high success rate with small gains per trade, or a lower success rate with higher gains on the winning trades... a 1:1 reward:risk ratio can be just as good as a 3:1 reward:risk ratio....

80% huh...Hmmmm


Okay, let me restate. If you average 80%, you're a
trading god and don't need to listen to peons like me.

 

[AllenZ]

Let me explain some of my feelings on stops as I have played this game awhile and played with many different theories. Here are some helpful things I have found in regards to stops.

1. Traders want this to be easy and automatic but really it is not.

2. When deciding a stop you must look at the action that proceeded your entry.
A. If you are playing a breakout and the move that caused the breakout was an extended move, if you place a stop too tightly you will likely get wiggled out prior to the move continuing.

B. If the breakout occurs from a base then you can use a tighter stop as the break should create less wiggle once the price burst occurs.

3. The ES, by nature, is a faders market as many new highs and lows reverse intraday, if you play fades or reversals keep stops pretty tight as they should reverse after a small break, say 1 - 1.5 points, so if a break of 810 creates a new low it may reverse off 808.5 - 809 area, so if you look to enter approx 809 with a stop at 807.5 if the price is going to reverse on that low you likely wont get stopped and a move back to 811-812 would occur. This is of course a hypothetical example but it illustrates the point.

4. Something that has helped me with entries is to look at ave stop taken as opposed to ave initial stop. This is a pretty interesting concept that I teach and in my humble opinion it has a lot of merit. My average position is entered with a 6-10 point stop and i look for a 8-10 point target ( NQ ). Many traders would consider this a 1:1 risk to reward ratio, but i see it differently. My data has shown me that most of my gains reach the target of 8-10 while only a low % of my stops are taken at the initial sto loss point. My ave gain is 7.8 ( data for past few months ) and my average loss is about 4.0. So while my initial stop loss offers a 1:1 risk /reward ratio my overall performance shows that my entries yield a 2:1 ratio or close to it.

One of my favorite sayings is this " don't blame your stop on your entry ", all this means is that if you enter a position into an extended trend looking for continuation your thought might be right but your entry is poor, then by using a tight stop you compound your problem.

My general advice is this:
1. Reversals and fades keep stops purposely tight and take profits quickly.
2. Trend continuations keep stops a bit looser and concentrate on a better entry to allow proper stop usage.
3. Extended breakouts, either tight stops and quick profit, or wider stop and look for better entry and allow trade to play out for larger gain.
4. Breakouts from bases use tighter stops and trail them wisely as trend develops.

Bottom line, focus more on proper stop than proper entry. If your entry requires too wide a stop to place it at correct levels then improve your entry or pass on the trade. In the long run your stops save you more money than your entries make for you so it only makes sense to concentrate there first. If you dont believe me, ask someone who has blown stops if their worst loss is bigger than their best gain. ( You better ask them quick cause they wont be around long )

One mans opinion, I could go on for days on this subject.

AllenZ

 

[Lobster]

Originally posted by Breakout




80% huh...Hmmmm


Okay, let me restate. If you average 80%, you're a
trading god and don't need to listen to peons like me.

I wouldn't necessarily say that, but the point is that you can afford 1:2 trades instead of 3:1 trades when 80% of your trades are winners. Or, to put it this way, if you put on 1:2 trades and have a good system, chances are, 80% or 90% of your trades will come through and you will still survive.

I personally believe that, especially then, you will survive and eventually prosper, since you get out on a limit a lot more often than on a stop, therefore you minimize overall slippage.

But of course, that's just the thoughts of a guy who would rather short naked options than buy them, so you decide for yourself how much weight you want to assign to my words.

 

[Breakout]

Originally posted by Lobster


I wouldn't necessarily say that, but the point is that you can afford 1:2 trades instead of 3:1 trades when 80% of your trades are winners. Or, to put it this way, if you put on 1:2 trades and have a good system, chances are, 80% or 90% of your trades will come through and you will still survive.

I personally believe that, especially then, you will survive and eventually prosper, since you get out on a limit a lot more often than on a stop, therefore you minimize overall slippage.

But of course, that's just the thoughts of a guy who would rather short naked options than buy them, so you decide for yourself how much weight you want to assign to my words.

When I say 3:1, I mean you make 3 dollars when you're
right and lose a dollar when you're wrong.


When you say 1:2, you don't mean you make a dollar
when you're right and lose 2 dollars when you're
wrong, do you?

 

[Mr Subliminal]

Originally posted by Breakout
Lets say I put on a trade(ES mini) and I'm long at 800.00.

Lets say my initial stop is 798.00 ( 2 pts)

If the market goes to 802.00, I raise my stop
to 800.25. (breakeven plus 1 tick to cover commish)

If it goes to 803.00, I raise my stop to 801.50

If it goes to 804.00, I raise the stop to 802.50

In other words, I trail my stop about 6 ticks until
I'm either stopped out or reach my profit
objective which is 806.00 (a 3 to 1 trade)

If I reach 806.00, I ring the register and start looking for
another trade.

Breakout : "Because I have to average a 3 to 1 ratio to survive."

Breakout : "When I say 3:1, I mean you make 3 dollars when you're right and lose a dollar when you're wrong."

With the stop strategy outlined above, you do not average 3:1.