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Gradation of stop loss

  • #1
  • First Post: Jun 27, 2007 2:43am Jun 27, 2007 2:43am
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?
Gone to a better place
  • #2
  • Jun 27, 2007 3:25am Jun 27, 2007 3:25am
Or another way: perhaps enter a trade with small lots and add to these as the pips mount? This is called pyramid trading, I think.
Gone to a better place
  • #3
  • Jun 27, 2007 5:51am Jun 27, 2007 5:51am
For the first post, my philosophy on stop loss orders is that their true purpose is to prevent a disastrous situation from happening, such as a runaway market or not being able to monitor your position. I have qualms with systems that use stop loss orders as their ONLY exit. A true and complete system should have an exit signal based at the close of a bar, and this should usually be hit before the SL order you place with your broker. Using SL orders as the sole exit is exactly the reason why stop hunters exist and take out your otherwise good trade.

That being said, I believe in setting a wide initial stop loss order, so that there's some room for the trade to develop. As long as you have an exit criteria (maybe an opposite signal on your indicators) in place and stick to it, you shouldn't have any problems.

On the second post, pyramiding does work miracles... if it is done properly. Otherwise, all it does is make bigger drawdowns. The first rule of pyramiding is NEVER do it if the market goes against your position. Sure, you could be "back at breakeven at a lower price" if the market bounces back in your favor, but more often than not, it never happens.

As for adding to your position when the market goes in your favor, don't just willy-nilly slap on more lots as the price goes up. Use a shorter term indicator to buy at the bottom of pullbacks and sell at the tops of rallies. Also, make sure that as you add to the position, your trailed SL/exit will get you out at a lower risk than your initial position. Because proper pyramiding is a delicate combination of analysis and money management, it really shouldn't be done unless you've had at least a year of trading experience.
  • #4
  • Jun 27, 2007 6:00am Jun 27, 2007 6:00am
Quoting bluebuddha
That being said, I believe in setting a wide initial stop loss order, so that there's some room for the trade to develop.
Funny, I believe exactly the opposite.

By analyzing and running statistics throughout my own trading records, I came to the conclusion that those trades that, upon entry, meander sideways without a clear direction and butt around at crawling speed are those that usually end up triggering my stoploss eventually. In the other hand, those in which I timed my entry properly and take off in my direction fairly quickly, hold a much higher probability of hitting my target price than my stoploss.

So, upon such statistic studies, I decided to play fairly tight stoplosses on my trades. In my opinion, a good trade does not require that much of a breathing room as long as you timed your entry right. If I miss-timed it, I'd rather exit out at a small cost, let price re-adjust itself and gather momentum once again, and re-enter upon the next breakout.

I simply refuse to be positioned in a momentum-less market - either it goes my way fairly quickly or I'm out of the deal (even if at a small cost).
  • #5
  • Jun 27, 2007 6:32am Jun 27, 2007 6:32am
Quoting WTB
Funny, I believe exactly the opposite.

By analyzing and running statistics throughout my own trading records, I came to the conclusion that those trades that, upon entry, meander sideways without a clear direction and butt around at crawling speed are those that usually end up triggering my stoploss eventually. In the other hand, those in which I timed my entry properly and take off in my direction fairly quickly, hold a much higher probability of hitting my target price than my stoploss.

So, upon such statistic studies, I decided to play fairly tight stoplosses on my trades. In my opinion, a good trade does not require that much of a breathing room as long as you timed your entry right. If I miss-timed it, I'd rather exit out at a small cost, let price re-adjust itself and gather momentum once again, and re-enter upon the next breakout.

I simply refuse to be positioned in a momentum-less market - either it goes my way fairly quickly or I'm out of the deal (even if at a small cost).
As I said, if you have a decent exit signal, that should get you out well before the SL order is hit. Low volatility, consolidation, etc are all exit signals... yes?
  • #6
  • Jun 27, 2007 7:33am Jun 27, 2007 7:33am
come to think of it, i rarely use it...
swap will gives 1 pip a day , to keep your stop loss away

ps: only works on position so small that you won't notice the loss
  • #7
  • Jun 27, 2007 7:36am Jun 27, 2007 7:36am
These posts do not necessarily conradict - the question being what a stop loss is for. BB reckons it's the fire exit, unless one uses it as a trailer and actually live in the trade.

WTB clearly starts his trade with a working stop loss so that if he goes for a cup of tea and pandemonium breaks loose, he's out of a trade which didn't gather the momentum he required.

Thanks - trading styles - food for thought
Gone to a better place
  • #8
  • Jun 27, 2007 8:21am Jun 27, 2007 8:21am
Quoting smikester
WTB clearly starts his trade with a working stop loss so that if he goes for a cup of tea and pandemonium breaks loose, he's out of a trade which didn't gather the momentum he required.
EEewwww Tea??!?!? I'd never do such thing !!!

Coffee > Tea
  • #9
  • Jun 27, 2007 9:08am Jun 27, 2007 9:08am
WTB had a point...theres a common observation, that the best trades take off and never look back...if you take this and put it into action with a tight stop, you will end up playing b/e trades 8 or 9 times out of 10..and the 1 or 2 winning trades will make you money...a solid and risk conservative stop policy, perhaps much more safer then the "catastrophic stop"...

anyway, you will not know, what stop to use, if you do not know, what target you play for..usually, your timeframe dictates your target and the target dictates your stop
  • #10
  • Jun 27, 2007 9:36am Jun 27, 2007 9:36am
Quoting peter100
WTB had a point... perhaps much more safer then the "catastrophic stop"...
I agree. I like that style. I had more in mind that kind of tight style until a trade gets under way, because we can't always monitor them properly.

Shame he WTB doesn't drink tea - I'd trust him more.
Gone to a better place
  • #11
  • Jun 27, 2007 10:56am Jun 27, 2007 10:56am
Quoting WTB
Funny, I believe exactly the opposite.

By analyzing and running statistics throughout my own trading records, I came to the conclusion that those trades that, upon entry, meander sideways without a clear direction and butt around at crawling speed are those that usually end up triggering my stoploss eventually. In the other hand, those in which I timed my entry properly and take off in my direction fairly quickly, hold a much higher probability of hitting my target price than my stoploss.

So, upon such statistic studies, I decided to play fairly tight stoplosses on my trades. In my opinion, a good trade does not require that much of a breathing room as long as you timed your entry right. If I miss-timed it, I'd rather exit out at a small cost, let price re-adjust itself and gather momentum once again, and re-enter upon the next breakout.

I simply refuse to be positioned in a momentum-less market - either it goes my way fairly quickly or I'm out of the deal (even if at a small cost).
i too believe setting a fixed risk % SL is ideal. first, i watch the potential of the trade. If it has a risk:reward potential of 2:1 or greater, i then enter and use a 2% stop loss.
My forex philosophy is that i will not win more than 50% of my Trades. Using a mental stop loss is too watchy for me. Unless u trading for longer term (couple weeks)
100% of traders are losers. Just that some win more than they lose!
  • #12
  • Jun 27, 2007 11:15am Jun 27, 2007 11:15am
Quoting Mr demark
i too believe setting a fixed risk % SL is ideal. first, i watch the potential of the trade. If it has a risk:reward potential of 2:1 or greater, i then enter and use a 2% stop loss.
My forex philosophy is that i will not win more than 50% of my Trades. Using a mental stop loss is too watchy for me. Unless u trading for longer term (couple weeks)
Could you give me an example and typical time frame of 2% stop loss on a trade with 2:1 RR potential? I don't quite understand.
Gone to a better place
  • #13
  • Jun 27, 2007 11:17am Jun 27, 2007 11:17am
Quoting Gwan
come to think of it, i rarely use it...
swap will gives 1 pip a day , to keep your stop loss away

ps: only works on position so small that you won't notice the loss
I like it Gwan. Not going to be losing too many $ then? Maybe a few pips though.
Gone to a better place
  • #14
  • Jun 27, 2007 11:25am Jun 27, 2007 11:25am
Quoting smikester
I like it Gwan. Not going to be losing too many $ then? Maybe a few pips though.
Forget about the pips!!!!!!!! They are not going to pay your bills.
Stubbornly persistent
  • #15
  • Jun 27, 2007 11:29am Jun 27, 2007 11:29am
I agree with WTB that you shouldn't need big SL's. Whatever your trading style, you are eventually waiting for the pair to move in a specific direction, and personally I've learned (the hard way) it's best to wait for a confirmation signal that the pair is actually moving before going in. Then your SL becomes automatic, it's at the point where your confirmation would have failed...

That being said, you have to look at your trades in terms of the volatility of the charts you are working from; I like to work on dailies and descend to 4 hours or even 1 hour for entries and exits. So I'll tend to use the smaller values (that one gets from a 1 hour chart) to set initial SL's, and once the trend is safely underway, move the SL's to what appears on the dailies.
  • #16
  • Edited 2:20pm Jun 27, 2007 11:41am | Edited 2:20pm
If you get an entry signal why not use a stop limit or stop market order with a fairly tight stoploss? I hear so many people say I placed my order and the market went against me immediately. If they had placed their order in such a manner that it only would have been triggered had the market been moving their direction, they might have eliminated a few of those bad trades.

WTB and BB both made good points. I have traded both styles and each style fits a specific style of trading. When I am trading longer timeframes and plan on riding a trade a while I use catastrophic stops. I don't tend to risk as much on these trades. If I'm trading hourly charts and below I use tighter stops and prefer to scale in according to my targets.
  • #17
  • Jun 27, 2007 12:11pm Jun 27, 2007 12:11pm
Looking back over the posts made while I was slowly pecking away on my keyboard here, I noticed some entry requirements. Although it's a bit painful to calculate, to get into a trade in a major way I estimate the annualized return rate. Most profitable trends accelerate fast to some speed, travel then gradually slow before being reversed (and accelerating the other way), so if you can get in at a relatively high speed part of the slope you have a reasonable chance of having the "momentum" (bad word from a scientific POV) carry you along for awhile. It's best to look at this in terms of "return rate", because it's a consistent measure across various ccy pairs.

Basically the return rate of a pair is given by (1/p)dp/dt, where p is the exchange rate, and dp/dt is the actual speed. It's best to normalize this to an annual rate, just like return rates on stocks, or interest rates. It's sensitive to your averaging length, so it helps to practice with it before using it.

But say you are using a 5-day and 13 day on the hourlies to determine the entry to a downtrend, then you would take the value of the 5-day average at the crossover, and it's value at the top before it started turning down. That gives the dp part. Take the difference in bars from the crossover to the peak, say 10 bars, which = 10 hours, then the dt part is

dt= 10hours/24hours/(240days/year) (noting there's roughly 240 trading days per year).

for p you can just use the value of the 5 day average at the peak of the curve. Lots of different variations here (365 days? p as the average of the value of the peak and the crossover point?) that don't really matter as long as you are consistent.

then multiply your result by 100, to get a percent.

It really helps if you write a program to do this for you. Much more useful than staring at a computer screen and praying it will go this way or that

Now for a profitable entry I find that that should be at least 100% return rate; profitable trends tend to stay above 50%; once they get down to around 20% they get quite subject to reversal, particularly when they are going opposite to the normal flow of investment/trade money.

And of course, none of this works when the BoJ decides they really don't like what's going on, and dumps (or withdraws) a few billion yen from the market - which is why your ultimate stop loss should always be never meet a margin call....
  • #18
  • Jun 27, 2007 3:37pm Jun 27, 2007 3:37pm
Thank you for that post. Damn fine effort I would say. I only hope I can be worth your while. Most generous.
Gone to a better place
  • #19
  • Last Post: Jun 27, 2007 10:14pm Jun 27, 2007 10:14pm
Quoting smikester
Thank you for that post. Damn fine effort I would say. I only hope I can be worth your while. Most generous.
You know the old saying "The devil finds work for idle hands"...(actually, I do this stuff partly because it's fun, and partly because I'd spend my time overtrading otherwise...)
But thanks!
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