Stop placements? | Forex Factory

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Stop placements?

  • #1
  • First Post: Apr 5, 2007 11:44pm Apr 5, 2007 11:44pm
I have been testing previous day H/L breakouts.My questions is about placing my stops. I understand the money management (1% for now) part. The best advice I've heard is depending on your strategy and how much you can tolerate. That doesnt tell me much because 1% risk can allow me 200 pips but that doesnt me it is a good stop. Am I missing something? Is there a book or something deals more specifically on the calculating which is your best exits in accordance with time frame I am trading instead of the entry?
I have seen a few references to using the ATR14 x 2 for a trailing stop.


thanks,
Noe
  • #2
  • Apr 6, 2007 3:24am Apr 6, 2007 3:24am
Vcam,
I don't know of any books about specific ways on this subject. One thing you need to realize is, if you want to place a stop 200 pips below the price you open at, you need to get more than a 200 pip gain before you close your trade. Otherwise, when you do get a 200 pip SL hit, if you are closing a trade before a 200 pip gain, in the long run you will lose money. Another thing, when you open a trade, you don't always need to use the same amount of pips for a SL. You can use the highs/lows for a SL. Don't put the SL right at a previous H/L though. Make sure you go a bit below the H/L. Also, smaller time frame charts usually require smaller SL's.
JOHN 3:16
  • #3
  • Apr 6, 2007 10:45am Apr 6, 2007 10:45am
Quoting vcam6
I have been testing previous day H/L breakouts.My questions is about placing my stops. I understand the money management (1% for now) part. The best advice I've heard is depending on your strategy and how much you can tolerate. That doesnt tell me much because 1% risk can allow me 200 pips but that doesnt me it is a good stop. Am I missing something? Is there a book or something deals more specifically on the calculating which is your best exits in accordance with time frame I am trading instead of the entry?
I have seen a few references to using the ATR14 x 2 for a trailing stop.


thanks,
Noe
Lots of methods to consider.
One I do use {psst.. is DS listening } Page 25 of Nison's "Beyond...
  • #4
  • Apr 6, 2007 10:53am Apr 6, 2007 10:53am
Quoting Bemac
Lots of methods to consider.
One I do use {psst.. is DS listening } Page 25 of Nison's "Beyond...
LOL. Yeah every thread with "stop" in the title attracts my attention.
  • #5
  • Apr 6, 2007 6:13pm Apr 6, 2007 6:13pm
Well this is a tough question to answer.
But like you already said: "depending on your strategy and how much you can tolerate" is the most applicable advice yet not really specific.

You have to figure out what a good S/L is based on your system's past performance. Each method has it's own optimal S/L settings. Whether it be a set number of pips, support/resistance breaks etc.

In your case, since you're looking at previous day H/L breakouts, your stop will depend on the currency pair. Some pairs have bigger ranges than other, so a smaller range pair will have a smaller stop loss as opposed to a pair like GBP/JPY that moves a lot of pips per day.

In addition, if you want to risk 1% per trade, it doens't mean that that's what your stop loss should be. What I mean is, you shouldn't automatically put a 200pip S/L cuz that's 1% of your account. First you figure out where your S/L needs to be and then according to that you adjust your position size (up or down) to match your 1% amount. (I hope that makes sense)

Your system's S/L setting needs to be established separately to your risk %.
First you find what's the best S/L in order for the system to be profitable long term, and then adjust the position according to what your risk per trade is.

All the best,
Tom
  • #6
  • Apr 6, 2007 6:37pm Apr 6, 2007 6:37pm
Originally posted by Rob Booker at this thread....

http://www.forexfactory.com/showpost...91&postcount=6

I've been thinking about stops lately. I wrote a long email this week in response to some questions. I hope it might be of help to you. My replies are in italics.

Dear Rob,

Haroldine and I have been having big back-and-forth discussions on the nature of the stops we want to be using, and would love to get inside your head on this...

For us, it is not a question of a tight stop meaning we lose less money if it stops out, because of the calculator we use. All our positions are figured on a fixed risk basis. So a tight stop means we have more lots riding on the trade. A distant stop means we have fewer lots on the trade. But a loss results in the same dollar amount to us in either event (about 1-1.25% of equity).

>>>First of all, there can't possibly be anything more important than what you are doing with your risk level. I have met traders time and time again who refuse to limit their risk and then one day, they pay dearly for it. They rack up gains (in some cases, spectacular gains) and then they blow it. They blow it so badly they shake their confidence in their ability to trade. In reality, they were good traders but they were poor money managers. They were good at entries and exits but bad at setting risk levels.

So... Haroldine contends: it's better to use a tighter stop, be able to apply more lots.

>>>Negatory. I have thought about ways that I could express this kindly, but I can't possibly go along with this general statement. I have thought and thought about what I might say here and this is the heart of what I want to communicate:

A stop is made up of two things:

1. A possible amount lost if the trade goes all the way to the stop loss.

2. A barrier, beyond which, the trade is no longer valid.

The stop has to include attention to both #1 and #2. It has to reflect a dollar amount, if lost, is not significant. But the stop has to be placed beyond a valid barrier -- or otherwise, we're just saying that we're smart because we're keeping the stop loss tight. When in reality, we're just setting up a trade to lose from the very beginning because we did not pay attention to #2.

Allowing ourselves to trade more lots with a smaller stop loss puts the focus on how much money we are possibly going to make, instead of what we stand to lose if the trade does not go in our preferred direction. Risk is defined, in my opinion, like this:

There will always be more possible negative outcomes than we admit to ourselves when opening a trade. There are more possible outcomes than actual outcomes.

Put our stop just above/below the most recent high/low at a place where, if it reached it, it would most likely mean that the technicals we saw that originally set our trade up are no longer in effect. For instance, if we saw a divergence trade to go short, if price kept going up another 30 pips, it's not likely to still be in divergence and our basic reason for being in the trade is gone.

>>>Now, with this added description, I am very much on board with what Haroldine likes. I don't like the term 'tight stop loss' because it assumes that all the importance is on how far away it is. What is really important in my opinion is that we don't stand to lose much money, and the stop loss is placed in an area where, if hit, the trade is no longer valid.

I contend: so often if we give a trade room it does comes around and do what we thought it would. Let's use our stops just to prevent that run-away big-bad-call when it doesn't. I started to mentally write a thesis "why short stops suck", but I had trouble saying it out loud three times in a row. And part of what I was thinking was that often times the technicals do hold true within a much broader band than we give them credit for. And a distant stop (or the scale-in as it goes against you idea) - as Boris says (in that chapter in his book I mentioned last week) lets you be right about the direction without also needing to be simultaneously exactly right about the timing of when the direction manifests.
But that goes back to our metric's question of last week - the losses seem bigger than the wins, so I'm reluctant to take them, and want to hold them off as much as I can, and it seems like a more generous stop helps that. But then the wins are smaller because our lots are smaller, and then a loss really messes with the metrics.

>>>This thought process is what eventually leads many people down the path of destruction. They allow themselves wider berth on the trade until it just consumes them. It "needs more room" is a statement usually expressed in order to not admit failure. And in trading, you're not paid to be right. You're paid to not lose money. Managing your risk, controlling your risk, is key.

But then I think, maybe Haroldine has it right, because if we took shorter stops, we'd have more lots working for us when we won, and wouldn't have to feel like we needed to hold them as long to really see we were getting something out of them.

>>>Right. This way of describing what Haroldine believes is much more valid, in my opinion.

(By the way, tight might be in the neighborhood of 20-40 pips on a 15 minute chart; loose might be in the neighborhood of 50-100 pips - really seeking out the prior significant swing point or Fib level to hide behind).

>>>But make sure it's not just a valid stop in the sense of number of points away from the entry, but also because it's placed behind a safe level.

And then what about that next layer - whether we ask a trade to start to perform quickly or we pull it, versus giving it time to mature and do whatever it needs to do for a bit and have more patience with it. We mentally hear our buddy Kim saying to us "patience little grasshoppers".

>>>I have found that with divergence trades, for example, it had better produce some happy candles quick. within the first few candles. Even the first one. If it doesn't, it is a very good sign, in my experience, that the trade is crap.

If we back off and start trying to think about our overall trading picture, the metric not the individual trades, how do we not get twitchy whenever a trade doesn't quickly go our way, and end up developing that kind of impatience that always pulls a trade before it has time to work?

>>>Trades don't care about time to work. You have to care about your account balance. Meaning, the market doesn't give a damn about your trade. The market as a whole isn't knitting sweaters for shut-ins, and as soon as it finishes it will get on with producing some gains. The market isn't an entity with respect for what it does for you and if you just give it some time, it will be happy with you and reward you. The market is a beast that wants to eat you and then pick its teeth with your bones. So if the market is acting like it ain't gonna do what you wanted it to do, then it is probably looking up recipes for "Stewed Trader," or "Trader a la King," or "Traders and Mash."

Help us!

1) Which stop loss approach do you favor - loose or tight - and why?

2) How do you know when to pull a trade even before it hits its stop, take a smaller loss than you budgeted for, without getting twitchy and second-guessing'y?

>>>I learn from testing. I have to go through a long series of trades using a number of different methods for getting out. That said, I am a big fan of "If the market is acting like it doesn't want to do what you want it to do, then that's a pretty good indicator that the market doesn't want to do what you want it to do."

Thanks so much!!!!!! Farroldine (and Haroldine is here saying hi too)


>>>This email took a long time to think out. Thanks for giving me the chance to do it thoughtfully.
  • #7
  • Apr 6, 2007 7:09pm Apr 6, 2007 7:09pm
Quoting moneybags
Well this is a tough question to answer.
But like you already said: "depending on your strategy and how much you can tolerate" is the most applicable advice yet not really specific.
...
Tom
3 Points to make here.
1: FX is Not Easy Money!
2: Risk your Toleration on a Single Trade and you will see your Starting account Equity Line resemble a Falling Star.

3:Reason: another opportunity will arise and you will have no Investment Capital left so you dig into the reserve because now you feel either You Need It, OR You Control It.
  • #8
  • Apr 6, 2007 9:51pm Apr 6, 2007 9:51pm
Hey Bemac,

I'm not sure I understand your points below.
Maybe you can expand on them.

For 1: I agree 110%.
2: Just to clarify on what I (and I believe vcam6) meant by toleration, is what your risk % toleration is per trade. (as far as money management goes)
So if you've decided to risk 1% per trade then why would that cause your starting account equity to fall? (maybe I didn't understand that correctly)
3: I'm not sure what exactly you mean by investment capital and reserve.
Isn't the investment capital your entire trading account?

Maybe you can shed some light on your pointers.

Thanks.

Tom

Quoting Bemac
3 Points to make here.
1: FX is Not Easy Money!
2: Risk your Toleration on a Single Trade and you will see your Starting account Equity Line resemble a Falling Star.

3:Reason: another opportunity will arise and you will have no Investment Capital left so you dig into the reserve because now you feel either You Need It, OR You Control It.
  • #9
  • Edited 11:13pm Apr 6, 2007 10:11pm | Edited 11:13pm
Quoting moneybags
Hey Bemac,

I'm not sure I understand your points below.
Maybe you can expand on them.

For 1: I agree 110%.
2: Just to clarify on what I (and I believe vcam6) meant by toleration, is what your risk % toleration is per trade. (as far as money management goes)
So if you've decided to risk 1% per trade then why would that cause your starting account equity to fall? (maybe I didn't understand that correctly)
3: I'm not sure what exactly you mean by investment capital and reserve.
Isn't the investment capital your entire trading account?

Maybe you can shed some light on your pointers.

Thanks.

Tom
Assumptions:
Tolerence to Risk = 2%.
2% of Account is equivelant to 1 Full Lot.
Trade Signal on EUR/USD so I throw 2% at it and it {of course} starts to hover in limbo.

Just at that point in time I get a Trade Signal on Both GBP/USD & USD/JPY.
Euro aint makin' me rich! Which one of these other signals sould I take? Chances are One of them will be right so I'll take Both.
Now I am @ 6% Risk Exposure.

Before all the research into MM on the Frums I used this formula.(And stil do)
30% of Account available for Margin
8% of the 30% as a maximum exposure on any single market.

Hey, it may not be perfect and I'm sure it could be improved on but it got ME out of the Wannabees in the mid 90's
  • #10
  • Apr 6, 2007 10:23pm Apr 6, 2007 10:23pm
Quoting Bemac
Assumptions:
Tolerence to Risk = 2%.
2% of Account is equivelant to 1 Full Lot.
Trade Signal on EUR/USD so I throw 2% at it and it {of course} starts to hover in limbo.

Just at that point in time I get a Trade Signal on Both GBP/USD & USD/JPY.
Euro aint makin' me rich! Which one of these other signals sould I take? Chances are One of them will be right so I'll take Both.
Now I am @ 6% Risk Exposure.

Before all the research into MM on the Frums I used this formula.
30% of Account available for Margin
8% of the 30% as a maximum exposure on any single market.

Hey, it may not be perfect and I'm sure it could be improved on but it got ME out of the Wannabees in the mid 90's
Gotcha.
Those are definitely some pitfalls to avoid.

I think it would serve all newbies well (and some non-newbies) to check out the MM stickies here.
Starting off on the wrong foot in the money management area is what blows out most people's account in the beginning.

By the time you realise your system ain't working, it's too late.
  • #11
  • Last Post: Apr 6, 2007 11:43pm Apr 6, 2007 11:43pm
Quoting moneybags
Hey Bemac,
Maybe you can shed some light on your pointers.

Thanks.

Tom
2: If you blow your wad on the first signal that cums your way then you deserve to be held out of the Market from future signals.
ie IF you have $3,000 to expose [10*0.3], Only risk $240 {3,000 * 0.08} on this one and save some for those that may follow You have a chance of riding the waves.

3: Keep in mind. The Deposit is the cost of doing business. Whether it sinks or rises is dependant on MY abilities.
Sample:
Start with 100..
Lose 20% {Balance now at 80}
Gain 25% {Balance now back at 100}
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