# Stop losses



## Johno (27 January 2009)

If your trading short term (over a couple of days, in and out) what would be your average stop loss?


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## CanOz (27 January 2009)

Johno said:


> If your trading short term (over a couple of days, in and out) what would be your average stop loss?




This was explained in the other thread johnno. You determine an entry level based on a resistance level (in a long) and then a support level for you stop. Assuming you already know you risk (2% ?), you then decide how many of the instrument to buy.

Work backwards:

1.) determine risk per trade = 2% or less is good
2.) pick a stock that you want to trade
3.) look for short term support and resistance (entry and initial stop)
4.) calculate how many shares you can buy
5.) place the limit order and stop loss
6.) manage the trade


CanOz


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## Johno (27 January 2009)

So Canny, are you saying that its a good idea to use a stop loss of 2% on any given trade? Say my whole capital was in on various stocks, are you saying a 2% stop loss would be ok?

The problem ive been having is that ive set my stop at 5%, then the stock would rally the next day after iv pulled out. So i set it at 10%, took a loss, and low and behold the stock rallied the next day...So do I go to 15%? Im seriously considering it as the market is so volatile, anything less would just see me losing money both on the stock itself and in brokerage.


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## Stormin_Norman (27 January 2009)

5% is what i use on a trade.

i then determine my stop loss (under support).

then lastly i determine the size of my trade.


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## Johno (27 January 2009)

Stormin, how would you do that if ummmm there is no support? I love trying to catch a falling knife, even if it costs me in the short term.


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## nomore4s (27 January 2009)

Johno, don't take this the wrong way but if you are serious about shorter term trading you need to do alot of study. To be successful will require alot of work and study, we have all been where you are now.

YOu have totally missed what Cana was saying. The 2% rule is based on your whole trading capital and is per trade.

What you need to do is work out 
1. Your entry price
2. Your stop loss price
Once you have these you can work out your position size.

EG - Buy price is $10.00, stop loss is @ $9.00 - Risk = $1.00
Total trading capital is $25,000.00 therefore 2% = $500.00
Max risk $500, so you can buy 500 shares ($500/$1 = 500)

Example 2 - Buy price is $5, stop loss is @ $4.50 - Risk = $0.50
Total trading capital is $20,000.00 therefore 2% = $400.00
Max Risk is $400, so you can buy 800 shares. 

You don't need to risk 10-15% or whatever. You just need to identify where your analysis is proven incorrect and place your stop there and then work out how many shares you can buy.

FWIW I only use 1% as I found 2% was a bit high.

This is why traders look for low risk set ups as it lets them buy larger parcels and potentially more profit for the same risk.


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## CanOz (27 January 2009)

Johno said:


> So Canny, are you saying that its a good idea to use a stop loss of 2% on any given trade? Say my whole capital was in on various stocks, are you saying a 2% stop loss would be ok?
> 
> The problem ive been having is that ive set my stop at 5%, then the stock would rally the next day after iv pulled out. So i set it at 10%, took a loss, and low and behold the stock rallied the next day...So do I go to 15%? Im seriously considering it as the market is so volatile, anything less would just see me losing money both on the stock itself and in brokerage.




I use less, 1% on equities and 1-1.25% on FX.

If you need to set wider stops then you compromise only the number of shares you can buy, not your risk...never compromise your risk.

The volitility is one reason swing traders are either not trading equities, or are trading shorter times frames. You not alone in your observations.

Cheers,


CanOz


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## nomore4s (27 January 2009)

Johno said:


> Stormin, how would you do that if ummmm there is no support? I love trying to catch a falling knife, even if it costs me in the short term.




This will end up costing you more then short term pain especially in this market, you are just guessing/gambling



Johno said:


> The problem ive been having is that ive set my stop at 5%, then the stock would rally the next day after iv pulled out. So i set it at 10%, took a loss, and low and behold the stock rallied the next day...So do I go to 15%? Im seriously considering it as the market is so volatile, anything less would just see me losing money both on the stock itself and in brokerage.




This is a common problem, you need to look at how you identify your trades and how/when you decide to enter. You need to be consistant in your analysis and trading system, just taking random punts will see you quickly get frustrated with the market or worse broke.


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## nunthewiser (27 January 2009)

stoploss?? WTF !! . why not be like many of the other traders in the various forums and never have a loss 


blessem


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## Stormin_Norman (27 January 2009)

Johno said:


> Stormin, how would you do that if ummmm there is no support? I love trying to catch a falling knife, even if it costs me in the short term.




i wouldnt do it 

i only trade with the trend. no falling knife catching for me 



nunthewiser said:


> stoploss?? WTF !! . why not be like many of the other traders in the various forums and never have a loss
> 
> 
> blessem




you can buy autotraders with 97% winning trades!!!!! for only $199USD. then retire to your condo and sip martinis with high class prostitutes.


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## Johno (27 January 2009)

nomore4s said:


> Johno, don't take this the wrong way but if you are serious about shorter term trading you need to do alot of study. To be successful will require alot of work and study, we have all been where you are now.
> 
> EG - Buy price is $10.00, stop loss is @ $9.00 - Risk = $1.00
> Total trading capital is $25,000.00 therefore 2% = $500.00
> ...


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## Stormin_Norman (27 January 2009)

i cannot recommend this post and the attached .xls enough.

http://www.mtptrader.com/showthread.php?t=1625


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## weird (27 January 2009)

If using intra-day stops, your stop loss should be 1 R ... that is, whatever technical stop you have determined ... then work out position sizing from that.

I got smacked severely today with a long-term trade in one portfolio, with an open loss of over 40% ... and using ATR ... this is just bad ... things just don't look good when a stock declines this much. 

For this system, I am not using fixed fractional ... and in reflection this loss or more importantly this type of stock could have been avoided ... as the exit checking just contributes this as normal behavior of the stock ... dumb ... so no exit YET triggered. We learn.

Normalization, including risk, with thresholds, can be a very useful thing.


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## Boggo (27 January 2009)

Stormin_Norman said:


> i cannot recommend this post and the attached .xls enough.
> 
> http://www.mtptrader.com/showthread.php?t=1625




Great link Stormin, and some great links/info within that link.

Matt and Steve really hammer that aspect of trading home.


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## beerwm (27 January 2009)

Hi

I'd just like to know what *kind* of stops you all use.

I get the impression most people are using support and resistance, [are these called pivot points?]

does anyone use volitilty? maybe volume? i'm not sure what else can be useful?

ideas?


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## Stormin_Norman (27 January 2009)

stop losses i use fixed ones.

stop (take) profits i use indicators.


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## CanOz (27 January 2009)

Boggo said:


> Great link Stormin, and some great links/info within that link.
> 
> Matt and Steve really hammer that aspect of trading home.




Another good way to point out that you do not need to be right, to be profitable!

Great link!

CanOz


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## mattyhammer (28 January 2009)

Stormin_Norman said:


> i cannot recommend this post and the attached .xls enough.
> 
> http://www.mtptrader.com/showthread.php?t=1625




Can someone shed some light on what this excel file actually does? I read the post and watched the video and had a play with it, but I'm not sure what I'm supposed to be learning from it.......or how it will help 'me'!! Don't get me wrong tho, it is a cool piece of kit and is amazing what excel can do, I just don't know how to use it.


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## Stormin_Norman (28 January 2009)

dont risk too much on a single trade.

anything over 5% and youre almost guaranteed to suffer gambler's ruin.


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## MRC & Co (28 January 2009)

Stormin_Norman said:


> dont risk too much on a single trade.
> 
> anything over 5% and youre almost guaranteed to suffer gambler's ruin.




Even 5% is WAY too high IMO.  Unless your win % is great, your risk of ruin is pretty steep.


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## CanOz (28 January 2009)

mattyhammer said:


> Can someone shed some light on what this excel file actually does? I read the post and watched the video and had a play with it, but I'm not sure what I'm supposed to be learning from it.......or how it will help 'me'!! Don't get me wrong tho, it is a cool piece of kit and is amazing what excel can do, I just don't know how to use it.




Its trying to tell you that you can flip a coin and still make money. In fact if assume a coin flip is a 50% chance of winning, its even better than the 35% win rate that they use on the simulator.

Its telling you to persevere, to let you winners run up at least 2.55 times more than you risk *when you do win* and you will be successful winning only *3.5 times out of ten trades*.

Its also telling you that the more you risk, the more you risk running out of capital before the expectancy can run the account higher. Try several runs at 1,2,3,4,5 and 10% risk per trade.


CanOz


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## AlterEgo (28 January 2009)

Johno said:


> Theres just not a great deal of good info on stop losses out there. A lot of ideas, but who is right....or ummm righter than the other person. Im just after a general feel of what a stop loss should be.




Who's right? Well the short answer is that they are probably all right. What sort of stop you use, and how tight your stop should be, really depends on your trading timeframe, the type of system you're using, volatility of stock, how strongly the stock is trending, etc, etc. You really need to find out what works for you, your trading style, and the type of stocks you trade. This takes time, particularly if you are new to trading and don't yet know what your trading style is. It took me about 4-5 years before everything began to gel and come together for me,...... and then the market changed and I've had to go back to the drawing board.....



Johno said:


> I understand how you get those numbers and what they are there for, I just want to know what would be your stop loss on your entire capital (because i generally put the whole lot in over a few separate trades). So if my calcs are correct it would be about 10%.....right?




I'm not sure if you have completely grasped the concept. Have a read on 'Fixed Fractional Position Sizing'. This sets a max. loss on any one trade (not the total trades on at any given time) to a certain % of your total account equity. A number of authors suggest a figure of 2%, but quite a few traders say this is too much and quote figures like 1%. I've used at various times figures from 0.5% up to 1.5%. These figures may not be practical to you, particularly if you have a small account size.

If you want some rough figure though, yes, 10%, for me, would be somewhere near to what it would work out to be over the whole portfolio. So that's about 8 trades with 1.25% risk per trade. ie. 8 x 1.25% = 10%. The trade risk, for me, may be anywhere from say 5% up to 15% or so of the trade value, but the position sizing is adjusted to equal say 1.25% of the total account equity.


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## AlterEgo (28 January 2009)

I should probably clarify my final point above. I would not recommend risking 10% of your equity by putting all your equity on at the one time. eg. if I usually had a total of 8 trades on, I would not enter all 8 positions on the same day. I would enter say 2 or 3 positions first, and only when those moved far enough in to profit for me to be able to raise my stops would I open more positions.


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## Stormin_Norman (28 January 2009)

yes. that's something i look at too.

having 5% on the AUDUSD and 5% on the NZDUSD is akin to having 10% risk on the 'one' trade because of their correlation between each other.

i imagine a similar example would be say ANZ + CBA banking shares, or two mining companies etc.


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## johenmo (28 January 2009)

Johno said:


> Im just after a general feel of what a stop loss should be.
> I just want to know what would be your stop loss on your entire capital (because i generally put the whole lot in over a few separate trades). So if my calcs are correct it would be about 10%.....right?




I have read this referred to as "portfolio heat" - how much of your capital you wish to put at risk.  Book by Justine Pollard (Smart Trading Plans) mentions.  She reckons she has 6%.  I bought this book and got a few things from it - it helped to tidy up some of what I'd learned from other sources.

Stop loss - I'm learning and from what I read a stop loss is more often dependant upon the stock involved, as opposed to a set % each trade.  Things like ATR can help you in determing a stop loss.  Am I right?


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## tech/a (28 January 2009)

My view is that a stop loss should be placed in a position where it is clear the reason you took the trade is no longer valid.
IE Wrong.
If trading technically that position is likely to be a lot tighter than if trading Fundamentally.

A similar discussion is going on over here with some charts to mull over.

https://www.aussiestockforums.com/forums/showthread.php?t=14201


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## lesm (28 January 2009)

A light read on stop losses, written by Rob Booker.


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## Wysiwyg (28 January 2009)

Here too is a quality paper on *Stop Techniques* first posted on ASF by Motorway I think. 1.16 MB pdf.


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## pilbara (28 January 2009)

Wysiwyg said:


> Here too is a quality paper on *Stop Techniques* first posted on ASF by Motorway I think. 1.16 MB pdf.



thanks for posting this, it is pure gold!  Figure 6 is a very good diagram of the process to follow.


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## MS+Tradesim (28 January 2009)

johenmo said:


> Stop loss - I'm learning and from what I read a stop loss is more often dependant upon the stock involved, as opposed to a set % each trade.  Things like ATR can help you in determing a stop loss.  Am I right?




Yes. Your stop should have relevance to each trade. ATRs make great stops because they account for the volatility of individual instruments. Other useful stops include just above or below recent support/resistance or just above or below recent turning points. It actually doesn't matter too much what you use as a stop, as long as it has some logical connection to the trade and your overall objectives.

There is one reason to use % stops and that has to do with maximum adverse excursion (MAE). If I were you, I wouldn't worry about that at this stage though.


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## johenmo (28 January 2009)

MS+Tradesim said:


> Yes. Your stop should have relevance to each trade. ATRs make great stops because they account for the volatility of individual instruments. Other useful stops include just above or below recent support/resistance or just above or below recent turning points. It actually doesn't matter too much what you use as a stop, as long as it has some logical connection to the trade and your overall objectives.
> 
> There is one reason to use % stops and that has to do with maximum adverse excursion (MAE). If I were you, I wouldn't worry about that at this stage though.




ATR or support/resistance seem to gel best (most relevance?) with me.  Read up on MAE and put that aside until I'm ready (if ever!).  YR comment re logical connection makes a lot of sense.


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## Johno (28 January 2009)

Thanks for all the links and information guys, this is great...

Im at work and on my lappy at the moment so hard to read through all of them, but will as soon as i get some time at home. Had a quick look and its exactly what im after...


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