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Stop Losses and Money Management

  • #1
  • First Post: Nov 7, 2006 12:29pm Nov 7, 2006 12:29pm
Hopefully someone can help me out here. I am having a rough time managing my money at the moment. The good thing is that I am waiting for the proper set ups and I am buying in the right direction. My problem is that I cannot seem to determine the right stoploss regimen.

I like to trade on the 1h and 4h charts. I check the daily chart for the trend and try to buy in that direction. When I place an order, I usually create a stop loss of about 30-45 pips depending on the last level of support/resistance or an MA cross. Since MT4's stop loss only kicks in when you have a profit, I manually move up my stop 30-35 pips below the latest price so that I can try and lock in profit. I use a trailing stop of about 35 pips but when the market retraces, it seems to take me out and I lose my profit.

Right now I think my entries are going very well. I have improved on this. However, I do not yet have a proper exit strategy other than a trailing stop loss. Is this the correct way to go about things? Relying on a trailing stop to lock in your profit? Can someone please help me with this as I think I am losing my mind lol. I can seem to enter properly now...but I am losing all my profits.

take care.
  • #2
  • Nov 8, 2006 7:13am Nov 8, 2006 7:13am
I think you're going to get different responses from different people. You'll also hear "it depends on your system."

One approach to consider is to have an initial partial profit target. Take a portion of your profit out and move the rest of your position to B/E. You can trail with the remaining position, or set a second profit target and then trail with the remainder after that.

Exits are one of the hardest things for people to figure out. I'm still trying to figure out my exits and have finally settled on a 20/40 split (1/2 position out at 20, move to B/E, second half out at 40 for net 30 pips on a 15m chart.)

Quoting vder
Hopefully someone can help me out here. I am having a rough time managing my money at the moment. The good thing is that I am waiting for the proper set ups and I am buying in the right direction. My problem is that I cannot seem to determine the right stoploss regimen.

I like to trade on the 1h and 4h charts. I check the daily chart for the trend and try to buy in that direction. When I place an order, I usually create a stop loss of about 30-45 pips depending on the last level of support/resistance or an MA cross. Since MT4's stop loss only kicks in when you have a profit, I manually move up my stop 30-35 pips below the latest price so that I can try and lock in profit. I use a trailing stop of about 35 pips but when the market retraces, it seems to take me out and I lose my profit.

Right now I think my entries are going very well. I have improved on this. However, I do not yet have a proper exit strategy other than a trailing stop loss. Is this the correct way to go about things? Relying on a trailing stop to lock in your profit? Can someone please help me with this as I think I am losing my mind lol. I can seem to enter properly now...but I am losing all my profits.

take care.
  • #3
  • Nov 8, 2006 10:29am Nov 8, 2006 10:29am
thanks for the reply! I think I am able to get in properly, but I think my main problem is determining market direction so that I can get out for a profit. How do you determine market direction?

Also, I am trying to trade on a 4h chart so that there are less whipsaws. Does it make sense to move up the S/L when the market moves in your direction? This is what I do.

Take care.
  • #4
  • Nov 8, 2006 10:39am Nov 8, 2006 10:39am
Try using pivots and fibo points for target prices.
  • #5
  • Nov 8, 2006 12:52pm Nov 8, 2006 12:52pm
ok firstly, what are pivots? Are these where the market reverses from a retracement?

I do use fibos, but seem to either get stopped out because I manually move the S/L or get stopped out because the market is just waving in a retracement rather than heading to its extension. I seem to have a knack for picking the wrong direction of the market lol. Sometimes it works out though and I make a lot of money but I am trying to work on stop loss limits so that I can maximize profits. More often than not...i am on the losing side of trades tho.
  • #6
  • Feb 20, 2007 1:06pm Feb 20, 2007 1:06pm
Hey vder, here is a money management method that I use which is independent of the specific trading strategy you employ:

I call it "Geometric Money/Risk Management" and the basic idea is to risk exactly some fixed percent of your account on each trade. Say for example you pick 3% as the fixed percent. Now your initial stop loss position should be determined technically by looking at the chart (it seems you already do this by picking your stop position to be above/below recent support & resistance levels, that's good). However many pips you are risking with that stop loss position, you can then figure out how many units/lots you should place on the trade so that if your stop does get hit, you will only lose 3% (or less) of your account.

I use OANDA for my broker and they let you pick any number of units for trade sizes (it doesn't have to be in block of 10,000 or 100,000). Because of that I am able to use their PIP/Profit calculator to engineer my trade sizes and find the perfect number of units so that my risk is exactly 3% of my account. However if your broker does not allow such flexible trade sizes, you can at least pick the number of fixed lots that is as close to risking 3% but without going over.

The trick is that you will always risk 3% of your current account balance at the time. So for example if you start with $1000 in your account, then on the first trade you will risk 3% of $1000, i.e. $30. If that trade is a loser, then you're down to $970 so on the next trade you will risk 3% of $970 (not $30 again), and 3% of $970 is $29.10.

The beauty of this money/risk management method is that it will dapen a losing streak. If you keep losing trades, the losses will get smaller and smaller. Theoretically your account will never reach $0 but only approach it asymptotically...but of course money is not continuous but has a smallest discrete unit (e.g. one penny). But the point is, it will help control your losses. In fact, at 3% risk, it would take a losing streak of about 22 consecutive losses before your account has been reduced to half of its starting value. The calculation for that is 22 = log(0.5)/log(0.97)

What's more is that it will accelerate a winning streak. Let's say you have a string of consecutive winning trades, all of which win 60 pips; your wins will get bigger (in terms of dollars or whatever your account is funded with) even though each time you are winning the same number of pips. Your account will grow geometrically (that's why I chose that name for the method).

This method has several advantages:
1. It dampens a losing streak.
2. It accelerates a winning streak.
3. You don't have to think about how many units to trade (just calculate it)...that's one less decision to make in your trading process, leaving less room for emotional error, etc.
4. It puts potential trade opportunity on an equal footing. You can be more objective about which trade setups you choose because you know that they will all have the same downside risk.
5. Some times traders might choose initial stop loss positions that are too tight just because they are nervous about losing too much. Stop should be chosen for technical market reasons, not for monetary reasons; the market doesn't care about your account. This method will prevent that because you can place the stop where you think it should be technically, and then find the number of units to keep the risk down to your acceptable level.

I have recently gone live with my trading and I've been having a tough time with my strategies...they just aren't working as well as they did in the demo. But by using this money management strategy, it has helped to preserve my capital and keep my total losses down. I was also using this method in my demo trading when the strategy was going well and the growth was phenominal! Too bad is was just a demo at the time :\

Essentially, with geometric money management, you get to be your own bank with a great interest rate! By compounding your profits (and losses) after each and every single trade, you maximize the potential of your trading strategy while keeping losses in control. Now I just have to find a good strategy.

I hope that helps! Let me know if anything was unclear about this method or if you need some help with the calculations. I'd be happy to explain it further.
  • #7
  • Feb 22, 2007 3:27am Feb 22, 2007 3:27am
vder,

maybe your prob is that the way you trade (trailing stop) generates a certain distribution pattern about you winning and losing trades...which seems to not match with your expectations...

as far as i can see, the way you trade will generate a lot of small winners or b/e trades and a lot of small losers...and some "homeruns", means trades, that manage to slip through your trailing stops in the early stage...those occasional homeruns make your money (which may not be worthwhile in a small account...thats why the saying goes: you need money to make money !)

if you want to change things, you have to use either a hard TP (going for a more high hitrate style) or a style where you leave your IPS in place, trying to extract the max profit potential with a very wide trailing stop (generating more losing trades, but getting some additional bigbig homerums)

in the end, what you take is more of a personal choise
  • #8
  • Feb 22, 2007 4:59am Feb 22, 2007 4:59am
hello mathematian,

the drawback of your strategy is that, it takes more time to recover from losses. For instance, after k consecutive losses, and later you have k consecutive wins, the final nav is less than the initial nav.

let's do a math:
denote a^b : a to the power of b
let the initial nav is x $
you're willing to risk 100*a % of your equity for each trade

equity after 1 loss: x - ax = x(1-a)
equity after 2 losses: x * (1-a)^2
equity after k consecutive losses: x * (1-a)^k

now you're starting to win k times
equity after 1 win: x * (1-a)^k * (1+a)
similarly, equity after k wins: x * (1-a)^k * (1+a)^k = x * (1-a^2)^k

since 0 < 1-a^2 < 1, x * (1-a^2)^k < x.

Hence, the final equity is less than the initial equity. In other words, you have to have more wins than losses to recover.
  • #9
  • Feb 22, 2007 7:57am Feb 22, 2007 7:57am
hello richy,

thanks for pointing that out. you're reasoning is correct under the assumption that the percent gain on a winning trade is equal to the percent lost on a losing trade. indeed if both your risk and reward are 100*a% of your equity (as you had it) then after one loss and one gain you will have (1-a)(1+a) = 1 - a^2 and of course 1 - a^2 < 1 as long as a is not zero. so it would certainly take more than one win to recover from one loss.

i usually go for a reward to risk ratio greater than 1. like if you risk 3% for a potential reward of 6%. then after one loss you have .97, followed by one gain and you have (.97)*(1.06) = 1.0282, more than making up for the loss.
  • #10
  • Feb 22, 2007 8:25am Feb 22, 2007 8:25am
Vder:
Have u considered leaving your trade alone. It does not seem that the method is the trouble. It may be that you are the trouble. I mean that psycologically u seem to be hung up on the present trade being a success rather than seeing the big picture. I base this on your constant fiddling w/ the stop. Have you determined if overall your method can be successful? If so leave the trade alone until it either hits your TP or SL. I receive a email regularly from Van Tharp. The latest has this to say:
Quote

Blinded by the Present

By D.R. Barton, Jr.

“The chief cause of failure and unhappiness is trading what we want most for what we want in the moment.” --unknown

Living in the current moment is generally a very good thing. Spiritual masters and writers throughout the ages have counseled against living in the past or worrying about the future.
And while staying in the moment is a good thing, obsessing about it can kill even a good trader. Placing too much importance on the current trade is a fault that Market Wizard William Eckhardt talks about in his famous interview in The New Market Wizards.
Eckhardt states, “What really matters is the long-run distribution of outcomes from your trading techniques, systems, and procedures. But, psychologically, what seems of paramount importance is whether the positions that you have right now are going to work.” (Emphasis is the author’s own.)
He goes on to state that this need to make the current trade work is so powerful that traders bend rules to try to will trades to work. In essence, this is the same as a trader's giving in to the “need to be right.”
The theoretical cure for caring too much about the current trade is pretty simple – follow your rules. (Or better yet, develop rules that have an edge in the market and follow them.) But the practical application is a bit tougher!
It’s easy to say that you need to follow your rules, but more difficult to implement. Almost all attempts to micro-manage trades tend to send us toward the human behavior of taking profits quickly and hanging onto losers. Both of which occur because we want to be right.
So how do we combat this micro-management problem as traders? One way is to make systems as mechanical as possible so that a computer or another trader can execute for you at your decision points.
But if you don’t have a staff or a strategy that is easily turned into computer code, then you need a way to keep from over-monitoring. Open your trade, place your stops (and profit targets or trails) and only allow yourself to check prices at set intervals.
Lastly, find a way to ingrain the belief that any one trade is unimportant. Your long term results matter, but this one trade doesn’t. If you can internalize that one thought, you’re well on your way to more consistent trading.
Great trading,
D.R.
Quoting vder
ok firstly, what are pivots? Are these where the market reverses from a retracement?

I do use fibos, but seem to either get stopped out because I manually move the S/L or get stopped out because the market is just waving in a retracement rather than heading to its extension. I seem to have a knack for picking the wrong direction of the market lol. Sometimes it works out though and I make a lot of money but I am trying to work on stop loss limits so that I can maximize profits. More often than not...i am on the losing side of trades tho.
In trading, there is no bullshit. You either make money or you don't.
  • #11
  • Feb 22, 2007 8:36am Feb 22, 2007 8:36am
mathematician, you're right. In your strategy, one needs to have a reward/risk of at least 1+a to recover from 1 loss with just 1 winning trade. This could be a must in trading.

Right now, what i am doing is, i use a fixed risk of x% of my recent highest equity. This means i keep my position size fixed when i am losing, and increase my position size when my equity is increasing.

Mine is more aggressive than yours. I'll be experimenting with yours. Thanks.
  • #12
  • Feb 22, 2007 11:28am Feb 22, 2007 11:28am
thanks for the replies everyone. I have been reading and studying forex and the majority of errors that I have been making for the most part are my own whether from lack of discipline or lack of knowledge. I have been learning to be more disciplined and that has helped. I am not losing quite as much as I used to and in my eyes thats a vast improvement. I will try and practice the money management that you have laid out. it seems quite manageable for me at this time. I have also learned to try and be less emotional and I have learned to take out a trade when I think it is reversing (Even though sometimes it reverts and heads back in the direction that I started with ).

Being a trader takes a lot of skill in many disciplines and I appreciate the feedback that you guys are giving me. thanks!
  • #13
  • Feb 22, 2007 12:27pm Feb 22, 2007 12:27pm
Quoting vder
How do you determine market direction?
You don't.

Unless or until you can account for every factor that influences price, you have no way of knowing exactly where price is headed. Your only opportunity for long term profit is to find something that occurs frequently enough to have a system designed around it. Once that system is designed you have nothing to worry about beyond taking each and every trade the system indicates you should.
  • #14
  • Feb 22, 2007 12:27pm Feb 22, 2007 12:27pm
Quoting mrgreen
I receive a email regularly from Van Tharp.
Where did you sign up for that?
  • #15
  • Feb 22, 2007 12:43pm Feb 22, 2007 12:43pm
  •  tesla
  • Joined Oct 2006 | Status: Friendly Neighborhood Programmer | 533 Posts
Quoting Darkstar
Where did you sign up for that?
There's a free weekly email, unsure if there are others.
  • #16
  • Last Post: Feb 23, 2007 2:43pm Feb 23, 2007 2:43pm
richy, that's an interesting method. u'll definitely recover losses quicker (of course u'll incur losses quicker. i'm curious to see how it works out for u.

if ur risking x% — let's assume the standard 0 < x < 1...i guess that's a per-unity not a per-cent — then to recover one loss with one win you will need to have your reward be:
(1-x)(1 + reward) = 1 ==> reward = 1/(1-x) - 1 = x/(1-x)
so the reward/risk ratio would have to be: [x/(1-x)]/x = 1/(1-x)

oh and another point about the geometric money management method: you can obviously control the overall aggressiveness by the size of the fixed percentage. i was using 5% before, but i found that pretty steep (cos i had a losing strategy...would have loved it if it was working LOL), so i cut it back to 3% while i'm back in research mode. maybe once i find a good trading strategy, i'll go back to 5% for more aggressive growth.
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