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Question about stop loss policy

  • #1
  • First Post: Jun 27, 2007 4:34am Jun 27, 2007 4:34am
I am sure, like me, many traders do not like to see a trade go against them when they enter it. I look at longer and shorter time frames (usually) to confirm that the trade I am planning will be a good one. Inevitably there are those trades which seem to go wrong and the worst ones are when the price seems to accelerate in the wrong direction!

I'm wondering if anyone can impart some knowledge about stop losses and how to manage them at the beginning of a trade. Is it a good idea to set it small initially and then increase to a realistic amount as the trade matures?
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  • #2
  • Edited 4:48am Jun 27, 2007 4:43am | Edited 4:48am
There are many answers to the question, but I personally use a statistical approach called an MAE analysis (Maximum Adverse Excursion).

Here is a brief explanation of what it is:

http://www.trade2win.com/traderpedia...erse_excursion

http://img140.imageshack.us/img140/3...riormaeyp2.jpg
  • #3
  • Jun 27, 2007 4:44am Jun 27, 2007 4:44am
Hi, what type of system is it? Intraday, swing (say a few days trade average) or longer term?
  • #4
  • Jun 27, 2007 4:53am Jun 27, 2007 4:53am
Wow. What kind of chart is that? Never seen anything like it. Thank you Mongoose, I will look into it.
Quoting Mongoose
There are many answers to the question, but I personally use a statistical approach called an MAE analysis (Maximum Adverse Excursion).

Here is a brief explanation of what it is:

http://www.trade2win.com/traderpedia...erse_excursion

http://img140.imageshack.us/img140/3...riormaeyp2.jpg
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  • #5
  • Jun 27, 2007 5:13am Jun 27, 2007 5:13am
I should really explain that chart to you.

I take out my stop loss from my trading system code, and export all the trades an excel spreadsheet in the following way:

ColA = Final profit
ColB = Maximum distance (in $) that the trade went against me.

I then plot that data on a scatter graph.

As you can see from the one above, once a trade goes $400 against me (where the red line is) it usually does not come back. Logically this is the point that I set my stoploss.

I have been doing these tests for many years and setting a stop is one part of the trading system design.

Other parts are Risk of Ruin, calculated consecutive losing trades and other such measures.

For example, take any backtested system and insert the results into excel this way:

If real consecutive losses = LOG(0.0001,(1-PW))

Where PW = backtested probability of a win.

For example, if the probability of a win is 43.37% then:

=LOG(0.0001,(1-0.4337)) ;the 4337 is 43.37% Probability Of A Win
;the 0.0001 is for a 1 in 10,000 probability of occurrence

You will find that this equates to 16.197, so I round up to 17 as it is better to err on the side of caution. I then use the worst figure from my backtested and calculated report.

If this figure strays outside that number, I then question whether the system is still viable, or just can it.

Here is an example plot to show you the relationship between probability of a win and consecutive losers.

http://www.reefcap.com/ubb/uploads/probabilityCL.jpg
  • #6
  • Jun 27, 2007 6:01am Jun 27, 2007 6:01am
Quoting Mongoose
I should really explain that chart to you.
You pre-empted my next question. Please feel free to elaborate if you have the time. This is exactly the sort of thing I was looking for. I am grateful and it looks like I'm in for a few hours of work here. Maybe days... (weeks? ...)`
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  • #7
  • Jun 27, 2007 8:57pm Jun 27, 2007 8:57pm
If I was starting out trading, I would firstly throw a few trading ideas around this forum and get some feedback from experienced traders who actually trade and make money. Ask for an account statement ro go through a few live trades with them. If they are unwilling, they are probably frauds or sellers of snake-oil.

Once you have a few core ideas, incorporate them into a trading system. Ideally you want to back test and my preferred software is Tradestation Pro Suite 2000i. There are, however, some lovely people on the forum who will backtest and provide comments on strategies.

Create your money management and position sizing rules and get to know your system.

Then do your demo test to get a good sample of trades.

Once you have compared your results to your backtest, you can make further decisions.

By all means, draw on the resources and experience of the forum members because many will be kind enough to help.
  • #8
  • Feb 22, 2018 8:33am Feb 22, 2018 8:33am
For anybody who may be interested, I now have formed my own policy of following the 20dma.
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  • #9
  • Feb 24, 2018 4:30pm Feb 24, 2018 4:30pm
I am interested

One can never have too many knowledge.... Can you share?

Thanks

Regards
  • #10
  • Feb 25, 2018 12:42am Feb 25, 2018 12:42am
Quoting smikester
I am sure, like me, many traders do not like to see a trade go against them when they enter it. I look at longer and shorter time frames (usually) to confirm that the trade I am planning will be a good one. Inevitably there are those trades which seem to go wrong and the worst ones are when the price seems to accelerate in the wrong direction! I'm wondering if anyone can impart some knowledge about stop losses and how to manage them at the beginning of a trade. Is it a good idea to set it small initially and then increase to a realistic amount as...
first and foremost you follow the trend from weekly to down whatever time frame you are trading to enter.if trade went against you temporarily,it will come back.
there are 4 options according to my limited knowledge:
1- close early if you have found out that it was a mistake
2.hedge it
3.matrianle
4.wait until it comes back in few weeks,you need to have big account and if it was a smaller lot trade.
  • #11
  • Feb 26, 2018 1:58am Feb 26, 2018 1:58am
Quoting Swnlobo
I am interested One can never have too many knowledge.... Can you share? Thanks Regards
Of course! Sorry for the delay in replying. I often enter on the hourly time frame and when I do that, I look at the H4 ATR(24) for a stop loss figure. Obviously this is lagging, but for measuring the volatility it is good enough. This is in order to get into the daily/weekly trend, not for day trading.

As for trailing stops, as I mentioned above, I look at the 20dma, the 20 day moving average. Additionally, I will look at important support/resistance levels and fundamental announcements, but that's a big subject.

If you are interested I can post a couple of charts.
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  • #12
  • Feb 26, 2018 3:03pm Feb 26, 2018 3:03pm
Quoting smikester
{quote} Of course! Sorry for the delay in replying. I often enter on the hourly time frame and when I do that, I look at the H4 ATR(24) for a stop loss figure. Obviously this is lagging, but for measuring the volatility it is good enough. This is in order to get into the daily/weekly trend, not for day trading. As for trailing stops, as I mentioned above, I look at the 20dma, the 20 day moving average. Additionally, I will look at important support/resistance levels and fundamental announcements, but that's a big subject. If you are interested I...
Thank You... Please do post

Regards
  • #13
  • Feb 27, 2018 2:30am Feb 27, 2018 2:30am
The best pair at the moment, for me, is Usd/Jpy. These are the main reasons. It is trending well. It is trading below last year's low. Here's a chart:
Attached Image (click to enlarge)
Click to Enlarge Name: UsdJpy180227W1support.PNG Size: 35 KB
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  • #14
  • Feb 27, 2018 2:33am Feb 27, 2018 2:33am
On the daily we can see the 20 dma is sloping nicely:

Attached Image (click to enlarge)
Click to Enlarge Name: UsdJpy180227D1.PNG Size: 32 KB
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  • #15
  • Feb 27, 2018 2:38am Feb 27, 2018 2:38am
All you need to do now is get in. Easier to say than do. But here is a good thread. You may already have read some of Peter Crown's posts. The hourly strategy used here to get in to longer trends is valuable. Of course there are lots of other methods. Once you are in, you can eventually use the 20dma to trail. I am not saying you should, or that the Usd/Jpy trades will make a profit. But that is what I am looking at just now. I hope this helps.
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  • #16
  • Last Post: Feb 27, 2018 3:37am Feb 27, 2018 3:37am
Quoting smikester
All you need to do now is get in. Easier to say than do. But here is a good thread. You may already have read some of Peter Crown's posts. The hourly strategy used here to get in to longer trends is valuable. Of course there are lots of other methods. Once you are in, you can eventually use the 20dma to trail. I am not saying you should, or that the Usd/Jpy trades will make a profit. But that is what I am looking at just now. I hope this helps.
I'm going to work on it!

Thank You very much for your insight and help.

All the Best
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