How To Set Stops - page 2

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Alain Verleyen
36052
Alain Verleyen  
TalonTrader:

Thoughts on stops in general.   I just saw the results of one trading competition and they bragged about how the top 10 winners all had 100% winning trades.  How short sighted.  They showed the profit, but didn't show the draw down it took to keep those 100% winners.

Nobody likes to lose!  The emotion involved in a losing trade is extremely powerful.  I understand completely why someone would rather move a stop than be stopped out, especially when they "know" the market it about to reverse BIG TIME.

But we all have to remember that any particular trade and even the whole market COULD just keep on going up forever!  (Especially with the new US Fed Chair, Janet Yellin who appears to strongly favor QE and money printing.)  

So on investing, swing trading, day trading, or even scalping is it not better to get out with "a small cut" (small loss) than to lose a finger, an arm, or even your whole life?  OF COURSE IT IS.

So take your small stops and move on to the next trade.    Set them and never move them wider.  There will be other trades.  There will be other days.  You have to be in the game to play and win.  We are here not be "right", but to make money.

I totally agree, unfortunately it seems people need to learn that the hard way : Could Someone Wins Every Trade? Lets Discuss.
Steven Theobald
721
Steven Theobald  
Candles:
I use the high/low points to set stops. Of course I will see if the stop is too wide and if it is I wait for a better opportunity.

Ah, yes.  Tried and true method.  Just visualize the recent swing high or low and set it a pip or two above/below.

But the WISDOM in the second part is worth repeating:

        WAITING for a good opportunity is the hard part sometimes when you really want to pull the trigger.

I see Candles that you are a serious and probably very successful trader.   Thanks for your contribution.

Rodrigo Malacarne
Moderator
11300
Rodrigo Malacarne  
I think my comment is a little bit late, but after 9 years trading stocks, futures and options I came up to the conclusion that one of the best places to put stops is around supports an resistances calculated through pivot points (https://en.wikipedia.org/wiki/Pivot_point). Sometimes prices break above or below resistances and supports, so it's dangerous to use R1 or S1 as stop points. I prefer to use R2 and S2, but sometimes, depending on my timeframe, I use R3 and S3 as well. Another interesting possibility is to put your hard stop (automatically placed) half way between S1/S2 or R1/R2. Another interesting thing about pivot points: there are tons of traders who use pivot points as entry and exit points, so it's interesting to consider not a hard stop (automatically placed) around R2 and S2 (or even R3/S3), but rather a temporal stop, i.e., if price closes below or above supports and resistances on a specific timeframe, it's time to get out.
Pivot point - Wikipedia, the free encyclopedia
Pivot point - Wikipedia, the free encyclopedia
  • en.wikipedia.org
A pivot point is a price level of significance in technical analysis of a financial market that is used by traders as a predictive indicator of market movement. A pivot point is calculated as an average of significant prices (high, low, close) from the performance of a market in the prior trading period. If the market in the following period...
Ubzen
5301
Ubzen  

From my experience, stops simply do-not offer anymore benefit then no-stops. Imo, stop-loss strategies as in deal_level stop-losses are more difficult to master than no-stop for the following reasons.

a) stops are distanced based
b) stops are directional based
c) most stops are static based
d) static stops run contrary to system logic
e) stops are harder to recover

Expanding upon a, someone setting stops have to be correct about the distance the market will move to_the_point. Allot of people thinking they can get this correct with any accuracy is just kidding themselves.

Expanding upon b, stops are directional based, most people who believe in stops also believe that the stops_loss should be smaller than the take_profit. This is to some extend the principal objection against no-stop systems. The smaller the stops you need, the more accurate you entry need to be. When you get in, price not only need to move in your direction, it needs to move to the level of the take_profit (lets not even get into trailing stops).

Again not all but most. If someone's using %percent risk per deal, you're locked with that lot-size. This leaves the system less capable of re-adjusting to changing market conditions. Which brings me to the next point.

Most people using stops are likely following the trend, predicting directions, predicting levels etc. If someone is entering a_long_position logic, then the best place to get out would be with the opposite logic. So, in my opinion, if you're getting out of your long_position, you must be thinking price is going to continue going down. Otherwise, why are you closing the position. Getting out because it hit your magic get-out number makes little sense to me. Ok, so you get out of a long_position to do what, wait and then get back into another long_position again?

Expanding on e, should someone lose 2% of their equity. If we're following text-book mm, the next position they'll take should be smaller than the first. Now should this same person recover 2% of new equity, they'll not be at break-even. Same as saying lose %50 of $100...you're at $50. Then gain %50 of $50 and that brings you to $75 and not back to $100. Some people would want to base %risk on deposits, thats kinda meh. It's like pretending all the losses don't count.

It'll be more interesting to talk about edge, risk-of-ruin, chances of doubling the account before losing it, average win-loss, winrate, average dd% etc instead of talking about stops or no-stops. I'm not letting the no-stoploss off the hook either, if someone really was to execute a margin_call strategy, then he/she should make the account the stoploss. Example if someone wants 2% stop-loss then deposit only 2% of your investment capital in the account. Blow that away... fine invest 2% of whatever remaining again and so on.

Like I alway say, the guy who takes $100 dollars to the roulette table (and leaves $9900 at home) cannot say he's better than the guy who toke all $10,000. If you're playing a losing game, you're playing a losing game no matter what your risk per trade is. In the end, one size doesn't fit all, what someone does depends heavily upon their strategy, money-mangement, investment capital, goals and psychology. All just my opinion.

Steven Theobald
721
Steven Theobald  
Malacarne:
I think my comment is a little bit late, but after 9 years trading stocks, futures and options I came up to the conclusion that one of the best places to put stops is around supports an resistances calculated through pivot points (https://en.wikipedia.org/wiki/Pivot_point). Sometimes prices break above or below resistances and supports, so it's dangerous to use R1 or S1 as stop points. I prefer to use R2 and S2, but sometimes, depending on my timeframe, I use R3 and S3 as well. Another interesting possibility is to put your hard stop (automatically placed) half way between S1/S2 or R1/R2. Another interesting thing about pivot points: there are tons of traders who use pivot points as entry and exit points, so it's interesting to consider not a hard stop (automatically placed) around R2 and S2 (or even R3/S3), but rather a temporal stop, i.e., if price closes below or above supports and resistances on a specific timeframe, it's time to get out.

Great ideas Malarcarne.  Sounds like a good approach I have not tried, mainly because I am really a scalper at heart, not a swing trader.   I have seen enough "self-fulfilling prophecies" to see the value in the pivot point approach, or even similarly the similar Fib approach, with 50% and 61.8 being the popular reversal zones.  (I have now heard of someone who has proved that neither of those is the correct number, but he wouldn't say what the correct number was.)   In either of these approaches, as you say, you would want to place the stop a few pips above R or below S, or you will get stopped out prematurely right as the price is (anticipated to be) reversing.

I agree in your approach that S/R 1 is probably not a strong enough repellant on many days to make them effective, but S/R 2 would be.

I don't understand your temporal stop idea.  Please explain.

Steven Theobald
721
Steven Theobald  
Ubzen:

From my experience, stops simply do-not offer anymore benefit then no-stops. Imo, stop-loss strategies as in deal_level stop-losses are more difficult to master than no-stop for the following reasons.

a) stops are distanced based
b) stops are directional based
c) most stops are static based
d) static stops run contrary to system logic
e) stops are harder to recover

Expanding upon a, someone setting stops have to be correct about the distance the market will move to_the_point. Allot of people thinking they can get this correct with any accuracy is just kidding themselves.

Expanding upon b, stops are directional based, most people who believe in stops also believe that the stops_loss should be smaller than the take_profit. This is to some extend the principal objection against no-stop systems. The smaller the stops you need, the more accurate you entry need to be. When you get in, price not only need to move in your direction, it needs to move to the level of the take_profit (lets not even get into trailing stops).

Again not all but most. If someone's using %percent risk per deal, you're locked with that lot-size. This leaves the system less capable of re-adjusting to changing market conditions. Which brings me to the next point.

Most people using stops are likely following the trend, predicting directions, predicting levels etc. If someone is entering a_long_position logic, then the best place to get out would be with the opposite logic. So, in my opinion, if you're getting out of your long_position, you must be thinking price is going to continue going down. Otherwise, why are you closing the position. Getting out because it hit your magic get-out number makes little sense to me. Ok, so you get out of a long_position to do what, wait and then get back into another long_position again?

Expanding on e, should someone lose 2% of their equity. If we're following text-book mm, the next position they'll take should be smaller than the first. Now should this same person recover 2% of new equity, they'll not be at break-even. Same as saying lose %50 of $100...you're at $50. Then gain %50 of $50 and that brings you to $75 and not back to $100. Some people would want to base %risk on deposits, thats kinda meh. It's like pretending all the losses don't count.

It'll be more interesting to talk about edge, risk-of-ruin, chances of doubling the account before losing it, average win-loss, winrate, average dd% etc instead of talking about stops or no-stops. I'm not letting the no-stoploss off the hook either, if someone really was to execute a margin_call strategy, then he/she should make the account the stoploss. Example if someone wants 2% stop-loss then deposit only 2% of your investment capital in the account. Blow that away... fine invest 2% of whatever remaining again and so on.

Like I alway say, the guy who takes $100 dollars to the roulette table (and leaves $9900 at home) cannot say he's better than the guy who toke all $10,000. If you're playing a losing game, you're playing a losing game no matter what your risk per trade is. In the end, one size doesn't fit all, what someone does depends heavily upon their strategy, money-mangement, investment capital, goals and psychology. All just my opinion.

WOW, where to begin???  Thanks for the great post!

"Imo, stop-loss strategies as in deal_level stop-losses are more difficult to master than no-stop for the following reasons."  -- You say they are more difficult to master.  Does this mean that someone shouldn't try to master them?  Does this mean they are less profitable?

You have done a really good job showing many of the challenges of properly setting stops.

"It'll be more interesting to talk about edge, risk-of-ruin, chances of doubling the account before losing it, average win-loss, win rate, average dd% etc instead of talking about stops or no-stops"-- I agree! But most traders flame out early because they don't control their losses.  And this is why I started this thread.  However . . .

I am very intrigued by your bold non-verbalized implied success with a no-stop method, so please articulate more here or start another thread called "Successful NO-STOP Trading" and provide a link.  One thing I have learned in trading is that their are thousands of ways to do this successfully, and I need to keep an open mind to new ideas.  It seems that you may be on to something really big, but I just can't get my mind around it yet for lack of information.  I sense some really deep thinking and practice (and success???)  with no-stop strategies.  Please tell us HOW you do it.  Most people (I am included here) who have traded with no stops get wiped out repeatedly because we consistently over-leverage at the next big "market turn" but have just completely misread the market.  Or we get "unlucky" day after day because the flapping-lip politicians simply won't shut up--and then they go print money and make prices move in completely unnatural ways.   Again, please show us what you do to finish with a profit at the end of the day (or week).

"most people who believe in stops also believe that the stops_loss should be smaller than the take_profit"   --I too have always been baffled by this thinking.  But then again I usually use just one to three simultaneous positions and take about 10 trades a day with a 90%+ targeted win rate.  I shoot for 6 pip win average and try to keep a 30 pip max stop.  (9x6=54 minus 1x30 = 24 pips win per day goal).  I know that many swing traders are highly profitable, but for me the risk of the 100 to 200 pip draw down is way too high when the market turns on me and just keeps rocketing the "wrong" way!  What do you recommend in this situation?  When do you cut your losses so you have something to trade with the following day?

Ubzen
5301
Ubzen  
TalonTrader:

WOW, where to begin???  Thanks for the great post!

"Imo, stop-loss strategies as in deal_level stop-losses are more difficult to master than no-stop for the following reasons."  -- You say they are more difficult to master.  Does this mean that someone shouldn't try to master them?  Does this mean they are less profitable?

You have done a really good job showing many of the challenges of properly setting stops.

"It'll be more interesting to talk about edge, risk-of-ruin, chances of doubling the account before losing it, average win-loss, win rate, average dd% etc instead of talking about stops or no-stops"-- I agree! But most traders flame out early because they don't control their losses.  And this is why I started this thread.  However . . .

I am very intrigued by your bold non-verbalized implied success with a no-stop method, so please articulate more here or start another thread called "Successful NO-STOP Trading" and provide a link.  One thing I have learned in trading is that their are thousands of ways to do this successfully, and I need to keep an open mind to new ideas.  It seems that you may be on to something really big, but I just can't get my mind around it yet for lack of information.  I sense some really deep thinking and practice (and success???)  with no-stop strategies.  Please tell us HOW you do it.  Most people (I am included here) who have traded with no stops get wiped out repeatedly because we consistently over-leverage at the next big "market turn" but have just completely misread the market.  Or we get "unlucky" day after day because the flapping-lip politicians simply won't shut up--and then they go print money and make prices move in completely unnatural ways.   Again, please show us what you do to finish with a profit at the end of the day (or week).

"most people who believe in stops also believe that the stops_loss should be smaller than the take_profit"   --I too have always been baffled by this thinking.  But then again I usually use just one to three simultaneous positions and take about 10 trades a day with a 90%+ targeted win rate.  I shoot for 6 pip win average and try to keep a 30 pip max stop.  (9x6=54 minus 1x30 = 24 pips win per day goal).  I know that many swing traders are highly profitable, but for me the risk of the 100 to 200 pip draw down is way too high when the market turns on me and just keeps rocketing the "wrong" way!  What do you recommend in this situation?  When do you cut your losses so you have something to trade with the following day?

You're jumping to conclusions :). What I implied is this. Saying that someone using (deal_level) stoploss will be successful because they're using (deal_level) stoploss = false. Saying that someone who isn't using (deal_level) stoploss will fail just because they aren't using (deal_level) stoploss = false.

Also what I'm implying is. Its easier to develop systems which gives better chances of securing the deposit with no-stoploss than with (deal_level) stoploss. If someone's goal is making 1% per day, there's no doubt in my mind, this is more difficult to accomplish using (deal_level) stop-losses.

In order to talk about successful trading, we'll have to first define what successful trading is. Is it trading for an extended period of time? Is it trading for a set profit level? Why do you believe we're seeing so many no-stop system in signals and very few (deal_level) stop-loss systems even tho we've all been told in trading 101 to use (deal_level) stop-losses?

Stop-loss systems can do quite well at trading for an extended period of time. And I'll argue that this is why most people recommend it. But staying alive and flourishing isn't the same thing. No stop-loss system can accomplish the same thing by taking on very low margin % of the account.

Again this topic is about how to set-stop-loss. Then it drifted unto no-stop being bad, I'm just offering a different opinion that neither is better than the other without considering allot of other things.

How to set-stop-loss is way too complex for someone to just say "here's how its done". Just my opinions tho.

Ubzen
5301
Ubzen  
TalonTrader:--I too have always been baffled by this thinking.  But then again I usually use just one to three simultaneous positions and take about 10 trades a day with a 90%+ targeted win rate.  I shoot for 6 pip win average and try to keep a 30 pip max stop.  (9x6=54 minus 1x30 = 24 pips win per day goal).  I know that many swing traders are highly profitable, but for me the risk of the 100 to 200 pip draw down is way too high when the market turns on me and just keeps rocketing the "wrong" way!  What do you recommend in this situation?  When do you cut your losses so you have something to trade with the following day?

Ok, I'll try answering the rest of your question and hopefully some value to the thread. This is just my personal take based again on my testing, trading and observations. Given your about approach, you and I wouldn't be too different in psychology and since we're all humans, I'd say most people gravitate to something similar.

  • 1> You want 90+% win-rate, I mean who doesn't.
  • 2> You're employing a range based strategy,
  • last time I checked, markets stays in range 90% of the time according to most sites.
  • 3> You get burn when the market trends, {surprise}

There's nothing wrong with being a range_trader or scalper or trend_trader. But as the saying goes, the markets moves in 3 ways, up | down | and sideways. Should I be trading for sideways, i'll be to some extend admitting that I do-not know which direction the market will go. If the market will stay in a range, does it matter which direction i choose ... i don't think so. Imo, a range never made any trader cry, just the trend or stop_loss trend trader :). If you're placing a 30 pips stoploss, then imo you're defining a trend as anything greater than 30pips. If this thing moves to 31_pips and comes back, you'll be correct about it being a range and wrong about the degree of the range. The less things you need to be correct about the better for your health.

Money-management is key here, and I'm not talking about lot_sizes in this instant. If I've learned anything about money management it'll be these 1) No money management can make a losing system into a winner. 2) Money management means risking a % of your risk_capital which is <= your edge. The problem with calculating edge in trading to any mathematical degree of certainty is very ambiguous. Therefore for #2 in trading, I just define as trading a very, very, very small % of your risk_capital. Chances are you aren't doing this, and most people aren't also because it wouldn't be exciting then. So in your case, you could probably afford the 200 pips draw-down if you toke a smaller lot_size. And if someone is already at minimum_lot size, then perhaps they should postpone trading until they have some more risk capital.

Ok, enough about how you're trading and now about how I trade. I see the markets only in two_modes range_or_trend. In grid_or_anti-grid. Grids obviously for range and anti_grids for trends. Imo, every system ever created can be expressed as grid or an anti-grid and are two sides of the same coin. Most people gets familiar with negative grids first. Anti-grid is where you add deals as the price moves in your direction. And then......wait for it.... stop loss when it doesn't go in your direction. Example gird size 10, you buy... price goes against you by 10 pips... you close and sell, price goes down down by 10 pip... you add another deal... when account hit a new high ... close all positions.

Both of these have distant characteristics like %win-rate etc. Both of them are equally as powerful in terms of get_rich_quick <<< depending on the lot size you're using, profit targets etc. There's a price to be paid for using larger lot size then someone can handle. When measuring performance of these [or any system] i divide the running $profit by the maximum draw-down in $currency. When this value falls below 1_(after couple of weeks), then then i become concerned. So to summaries: 

  • Trading: I use grids or anti-grids.
  • Money Management: small percentage% of risk capital deposited. Harvested as soon as it doubles.
  • Stop-loss: Account level stop-loss. Deal_level stop-loss on anti-grids only.
Steven Theobald
721
Steven Theobald  
Ubzen:

You're jumping to conclusions :). What I implied is this. Saying that someone using (deal_level) stoploss will be successful because they're using (deal_level) stoploss = false. Saying that someone who isn't using (deal_level) stoploss will fail just because they aren't using (deal_level) stoploss = false.

Also what I'm implying is. Its easier to develop systems which gives better chances of securing the deposit with no-stoploss than with (deal_level) stoploss. If someone's goal is making 1% per day, there's no doubt in my mind, this is more difficult to accomplish using (deal_level) stop-losses.

In order to talk about successful trading, we'll have to first define what successful trading is. Is it trading for an extended period of time? Is it trading for a set profit level? Why do you believe we're seeing so many no-stop system in signals and very few (deal_level) stop-loss systems even tho we've all been told in trading 101 to use (deal_level) stop-losses?

Stop-loss systems can do quite well at trading for an extended period of time. And I'll argue that this is why most people recommend it. But staying alive and flourishing isn't the same thing. No stop-loss system can accomplish the same thing by taking on very low margin % of the account.

Again this topic is about how to set-stop-loss. Then it drifted unto no-stop being bad, I'm just offering a different opinion that neither is better than the other without considering allot of other things.

How to set-stop-loss is way too complex for someone to just say "here's how its done". Just my opinions tho.

Well articulated.  There are certainly many ways to set stops--for those who choose to use them.  I started with 7 ideas, and at least a couple more have been presented.  Again, it all depends on the time frame and the risk tolerance of the trader.  And if (s)he chooses not to use stops, he better be analyzing things just as much or more so he can stay alive.   Then, as you said, he must "flourish" and not merely just stay alive.  This is quite complex, but your voice is heard, that NO STOPS may be just as viable-- however, I propose that the level of discipline and adherence to the method must certainly be no less than a stop-method since the potential risk for loss is as big as the account.
Alain Verleyen
36052
Alain Verleyen  
Those who are interested in this topic will be probably also this post.
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