# Stops - Why So Important?



## MichaelD (11 November 2006)

Q: Why should you use a stop?
A1: Because you'll make more money more consistently by using a stop than by not.
A2: Because you'll preserve your capital whilst you're learning how to trade.

Q: But I traded XYZ and was stopped out only to see it go sky high afterwards!
A: Stops do that sometimes. However, stops also protect you from a stock which keeps going down. The protective effect on your capital outweighs the whipsaw effect many times over. You can always re-enter a rebounding stock. You can't exit a stock in freefall in hindsight.

Q: What's the best stop?
A: There is no perfect stop, just as there is no perfect entry. A stop which is too close to the price action will take profits quickly, but will suffer from frequent whipsawing. A stop which is too far away from the price action will give back too much profit before exiting a trade.

Q: Aw c'mon, what's the best stop?
A: Your stop strategy determines your trading frequency. Are you a long term trend follower? Use a wide stop. Are you a trader who wants to hold for days/a few weeks? Use a tight stop. As a hint for new traders, your best chance at surviving is to learn to trade longer time frames first, and then consider shortening your average holding time.


Is there interest in continuing this?


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## ducati916 (11 November 2006)

*MichaelD* 



> Q: Why should you use a stop?
> A1: Because you'll make more money more consistently by using a stop than by not.
> A2: Because you'll preserve your capital whilst you're learning how to trade.




On the surface, [*A1*] would seem to be a reasonable premise.
However, the premise only holds true if; the system [methodology] is *profitable in real time*. If the methodology proves to be a failure, then of course, it will prove to be false.

Premise *A2* is also false [assuming for the moment a losing methodology]. Correctly stated, it will possibly take longer to lose your capital utilizing a stoploss strategy.



> Q: But I traded XYZ and was stopped out only to see it go sky high afterwards!
> A: Stops do that sometimes. However, stops also protect you from a stock which keeps going down. The protective effect on your capital outweighs the whipsaw effect many times over. You can always re-enter a rebounding stock. You can't exit a stock in freefall in hindsight.




Again, an assumption, [pending evidence of the net effect of stoploss whipsaws] that this is in point of fact the case. An issue that can arise in regards to re-entry, is the psychological difficulty encountered in re-entering a stock [sometimes within minutes if you daytrade] of a stock that has just caused you a loss.



> Q: What's the best stop?
> A: There is no perfect stop, just as there is no perfect entry. A stop which is too close to the price action will take profits quickly, but will suffer from frequent whipsawing. A stop which is too far away from the price action will give back too much profit before exiting a trade.




The closer the stop, the higher [determinatively] the likelihood of the stoploss being activated. This increased stoploss activity carries psychological consequences for the active trader.

Conversely, stoplosses that are quantitatively too far from the price action, carry position sizing, %loss/trade, implications that can undermine an otherwise robust trading plan.



> Q: Aw c'mon, what's the best stop?
> A: Your stop strategy determines your trading frequency. Are you a long term trend follower? Use a wide stop. Are you a trader who wants to hold for days/a few weeks? Use a tight stop. As a hint for new traders, your best chance at surviving is to learn to trade longer time frames first, and then consider shortening your average holding time.




As a thread teaser, to stimulate discussion, I have no problem with the above statement. As a recommendation, or catch-all strategy, it is fraught with problems. One of which is linking the element of time, with price, without any logical or correlative evidence.

jog on
d998


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## tech/a (11 November 2006)

ducati916 said:
			
		

> *MichaelD*
> 
> On the surface, [*A1*] would seem to be a reasonable premise.
> However, the premise only holds true if; the system [methodology] is *profitable in real time*. If the methodology proves to be a failure, then of course, it will prove to be false.
> ...




The point Michael is making is at WORSE a stop will keep you in the game (By preserving Initial Capital). longer.



> Again, an assumption, [pending evidence of the net effect of stoploss whipsaws] that this is in point of fact the case. An issue that can arise in regards to re-entry, is the psychological difficulty encountered in re-entering a stock [sometimes within minutes if you daytrade] of a stock that has just caused you a loss.




Stop placement is a little understood and rarley taught (Infact I havent seen anything other than rudimentary stop placement and position sizing discussed anywhere including books). Both Initial stop and Trailing stops. *Timeframes* need to be considered as does the *style* of trading.,Fundamental,Technical,Swing trading,Support and Resistance reversal,Pattern trading,Breakouts---the list goes on.



> The closer the stop, the higher [determinatively] the likelihood of the stoploss being activated. This increased stoploss activity carries psychological consequences for the active trader.




This is a trader problem not a stop issue.



> Conversely, stoplosses that are quantitatively too far from the price action, carry position sizing, %loss/trade, implications that can undermine an otherwise robust trading plan.




This is a lack of Blueprint problem a lack of understanding of performace when a particular stop methodology is adopted.



> As a thread teaser, to stimulate discussion, I have no problem with the above statement. As a recommendation, or catch-all strategy, it is fraught with problems. One of which is linking the element of time, with price, without any logical or correlative evidence.




Thread doesnt need a teaser with the 3 of us here!!

Its often thought that the 2 reasons for stops are:

(1) To minimise loss
(2) In the case of purpose placed Trailing Stops--To maximise profit.

Id like to add a third to the discussion. With respect to Placement. Of both an Initial and OR a Trailing Stop loss.

*(3) Minimising LOST OPPORTUNITY---refered to as opportunity cost.*

*Taking the case of the INITIAL stop.*In longterm trading you dont wish to have your trade stuck in between a set stop position and your original buy.--The wider the stop the more likely in some trading methodlogies this is likely to occur.
You want your portfolio FULL of performing stocks.
Short term traders want MORE winning trades and dont wish to be trapped in trades which dont move quickly in their favor.

*Taking the TRAILING stop.*
Same applies ---long periods of stagnant trading can be costly as other opportunities need to be passed up due to lack of funds.
For the short term trader this is the case as well as the chance that WITHOUT a trailing stop in quick outlier moves he may well give back larger amounts of un realised profit than he need to.


*The aim is to 
(1) Have more wins
(2) Have larger wins that $ risked.
(3) Ideally both (1) and (2).*

Correct application of stops (that in itself is an art form.) has the potential to maximise all 3---

Take care of the 3 above and profit will come!

Duc---Do I detect a mellowing indeed perhaps an acceptance for a place in trading for stops??


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## ducati916 (11 November 2006)

*tech/a* 



> The point Michael is making is at WORSE a stop will keep you in the game (By preserving Initial Capital). longer.




It is a statement of convenience, not of penetrating thought.
To successfully implement a stoploss strategy, the expectancy must be a fact, not a hypothetical.



> Stop placement is a little understood and rarley taught (Infact I havent seen anything other than rudimentary stop placement and position sizing discussed anywhere including books). Both Initial stop and Trailing stops. Timeframes need to be considered as does the style of trading.,Fundamental,Technical,Swing trading,Support and Resistance reversal,Pattern trading,Breakouts---the list goes on.




Agreed, and as such a vital component of seemingly the majority of traders, why such a rudimentary and incomplete understanding of the theory?



> Quote:
> The closer the stop, the higher [determinatively] the likelihood of the stoploss being activated. This increased stoploss activity carries psychological consequences for the active trader.
> 
> 
> This is a trader problem not a stop issue.




Incorrect.
Stoplosses lend themselves to quantitative analysis, in exactly the same manner as any other data based methodology.



> Its often thought that the 2 reasons for stops are
> 
> (1) To minimise loss
> (2) In the case of purpose placed Trailing Stops--To maximise profit.
> ...




Herein lies an interesting area for analysis;
Viz. does the opportunity cost provided by stoplosses exceed the cost of stoplosses? I am dubious.



> Duc---Do I detect a mellowing indeed perhaps an acceptance for a place in trading for stops??




No not really, but I accept that for technically based traders, they [stops] are indispensible, thus, they should be used as efficiently as possible.

jog on
d998


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## Julia (11 November 2006)

Interesting exchange.  Thanks for starting it, Michael.
Plenty of us who will continue to find this discussion useful.
Please keep it going.

Julia


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## It's Snake Pliskin (11 November 2006)

Tech described the CORRECT usage of stops as an art.

I would say avoiding the manipulators is the art.

What about profit taking stops vs trailing stops? Care to comment?


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## ducati916 (11 November 2006)

It's Snake Pliskin said:
			
		

> Tech described the CORRECT usage of stops as an art.
> 
> I would say avoiding the manipulators is the art.
> 
> What about profit taking stops vs trailing stops? Care to comment?




The history of the stoploss came from professional gambling & the systems built around card counting. Here, numbers, quantitatively defined the parametres, and there was very little *art* involved.

The stoploss as a tool within the stock-market, and technical trading in particular blunted the quantitative, and introduced a highly qualitative element due to, in a pack of cards, the total number of cards are known, thus as cards are played, the probabilities of various hands can be calculated. In the stock-market, the variables remain unknown, thus probabilities are far more difficult to calculate.

This leads directly to the problem of *where* to place the stop.
How strong in terms of probability is the set-up [support/resistance as an example] and thus how tight or loosely can the stop be placed?

The manipulators.
In the US market they do exist, and are the various market makers.
On the ASX, certainly in made markets, the same probably applies [Options & Warrants] however, there are checks and balances that maintain a degree of honesty outside of daytrades........and even daytrades are not exempt, save for very thinly traded securities.

They will run your stops.
This is a fact of life in the US.
Get used to it.
With the right indicators you can usually, but not always see them run the stops, but on occasion, they know something before every-one else trading the security and you will lose money.

Trailing stops are the only stops that I will implement.
Having said that, they are not without their own set of problems.

jog on
d998


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## MichaelD (11 November 2006)

As can be seen from the range of replies to date, stops mean different things to different people, and there are a wide range of opinions on how to use them.

At their heart, stops are a mechanism whereby you accept that your reason for being in a trade no longer exists. i.e. you either accept that you were wrong about a trade and cut your loss short, or you accept that it is time to close the trade and bank your profits. There are lots of ways to achieve this outcome. Stops are the most concrete way for beginners to start down this path.

The issue I'd like to discuss next is whether or not to place your stop in-market, so that it triggers if intra-day trading hits your stop price.

The major advantage of an intraday stop is that control of taking the stop loss is taken out of your hands. If the stop loss price is hit intraday, your trade will close (subject to some intraday stop loss caveats such as a large gap downwards). There is no issue with your psychology getting in the way of taking a stop loss.

The major disadvantage of an intraday stop is that control of taking the stop loss is taken out of your hands. Downwards price spikes during the day will take out your stop, even though the price may then rebound strongly to the close.

An end-of-day stop is one marked on your chart but not placed in market. You look at the day's price action after the close and decide whether to close the trade the next day.

The major advantage of an end-of-day stop is that it is not affected by the extremes of intra-day price action.

The major disadvantage of an end-of-day stop is that it requires very strong discipline on your part to always execute it the next day. There's always the temptation to hold on if the price rebounds the next day.


So which is better?

The backtesting I have done shows conclusively that an end of day stop works better for long term trend trading. I haven't tested other trading styles in this way. With an intraday stop there is more whipsawing and the system is less profitable overall. (For the more advanced readers, the drawdown is significantly higher.)

What you have to answer for yourself is which method will work better for you. Will you be able to take your stops regardless? If so, use an end-of-day stop. Do you continually find yourself giving a stock "just one more chance" to recover? Use an intraday stop.


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## ducati916 (11 November 2006)

> i.e. you either accept that you were wrong about a trade and cut your loss short, or you accept that it is time to close the trade and bank your profits.






> Q: But I traded XYZ and was stopped out only to see it go sky high afterwards!
> A: Stops do that sometimes. However, stops also protect you from a stock which keeps going down. The protective effect on your capital outweighs the whipsaw effect many times over. You can always re-enter a rebounding stock. You can't exit a stock in freefall in hindsight.




Herein lies the problem.
Stoplosses tell you nothing about the security.
They tell you nothing about whether your analysis was correct, or incorrect.
As soon as you attach an emotion to a stoploss [right/wrong] you are mis-using the theory.



> There are lots of ways to achieve this outcome. Stops are the most concrete way for beginners to start down this path.




I can think of two or three ways.
All of them are superior to stoplosses.
However, as you broached the subject, you can expand the discussion if you so care.

jog on
d998


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## tech/a (11 November 2006)

God you guys so much to cover!!!



> The stoploss as a tool within the stock-market, and technical trading in particular blunted the quantitative, and introduced a highly qualitative element due to, in a pack of cards, the total number of cards are known, thus as cards are played, the probabilities of various hands can be calculated. In the stock-market, the variables remain unknown, thus probabilities are far more difficult to calculate.




In my case and Michaels there is definately a quantitive known when applying a stop to a trading system.The results will be markedly different relative to the stop placement.Using T/T as the example stop placement from 10% of initial purchase to 20% will decrease number of times stopped.It increases nett profit.Increases Drawdown and Gives anything BUT a smooth equity curve.
Cutting it to 5 % decreases everything but the number of times stopped and smooths the curve.In the end a balance is found I choose 10% as its easy but 8% is the optimum. 
The stop itself has nothing to do with the analysis and everything to do with Initial capital preservation, and maximisation of opportunity.



> This leads directly to the problem of *where* to place the stop.
> How strong in terms of probability is the set-up [support/resistance as an example] and thus how tight or loosely can the stop be placed?




In a discretionary trading application there are two distinct issues here.
(1) Really its not important for the same reason as shown above and 
(2) Michael answered it nicely--in terms of an INITIAL STOP--At their heart, stops are a mechanism whereby you accept that your reason for being in a trade no longer exists. i.e. you either accept that you were wrong about a trade and cut your loss short,



> The manipulators.




Where there are no Market makers or futures funds or huge players like banks,manipulation of stops in shares is highly un likely,its simply too big for even big fish punters.



> An end-of-day stop is one marked on your chart but not placed in market. You look at the day's price action after the close and decide whether to close the trade the next day.




For EOD trading,for stops,initial and trailing and for exits I prefer CLOSE below X point. It evens itself out with slippage to the downside and slippage to the positive over time.



> Herein lies the problem.
> Stoplosses tell you nothing about the security.




They dont have to.



> They tell you nothing about whether your analysis was correct, or incorrect.




Again they dont tell you that its wrong or right they are simply a line in the sand where YOU the analysis says at that point I no longer feel my analysis is valid on this move. See my AIM stop at 21.5c on that thread.The stop says nothing but price at 21.5c will say something to me. Price action beyond my sell if it comes to that will have no interest for me,other than possible further opportunity to do it all again. If it goes to sleep then I lose interest very quickly.



> As soon as you attach an emotion to a stoploss [right/wrong] you are mis-using the theory.




True its a line like that at a stop sign.I stop at it!! If I dont I run the risk of being injured or Killed.
After I stop at it and then move on I no longer think about the stop---it has served it purpose.

Think about this analogy and the implications of not taking the stop.
The results are similar to the stop market. How lucky do you feel punk---was it 6 shots or seven???



> I can think of two or three ways.
> All of them are superior to stoplosses.
> However, as you broached the subject, you can expand the discussion if you so care.




I lookforward to these Duc,when your able to share. Im certain you'll have loads of stats.
With all due respect your work in progress is a great example of failure to implement a stop. (Yes I understand your methodology---and yes You know I think your snafoood re making 30% a year).
By simply taking a 10% stop in your trades your profit would be dramatically different and your opportunity to allocate funds into working stocks IE profitable----would be dramatically enhanced.You have massive funds chewing up the profit gained in 40% of your trades.Its not working for you!

The benchmark T/T has achieved its 30% gains already for the year with a few stops along the way. Sure its open profit as your have open loses.
If both portfolio's were sold Monday you have a nett return of 1.95%---- I 30% plus a bit.


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## 2020hindsight (11 November 2006)

tech/a said:
			
		

> God you guys so much to cover!!!



tech - thanks for going to the trubel of explaining stop losses so thoroughly - whether or not I agree lol    truly appreciate your efforts - If I disagree, it's purely becos you're swimmin in the deep end of the pool , and I'm still in the beginner's pool lol.

The rest I'll post this in small print - consider it trivia .   
personally I dont use stops - just have to fall back on old fashioned buddhist work ethics and patience - wait till it comes good again lol - 

I'm probably the only bloke to lose on KZL - but that was cos I came in in May - and got out when it went down ( equivalent to stop loss I guess) fortunately I got back in   thanks again , 2020

PS I ask experts "stop losses" - why would you use em ?   they say - NEVER reward stock that is heading down by holding it ... THEN I mention the example of KZL - they say - ahhhhh that's DIFFERENT lol


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## constable (11 November 2006)

Tech/a have got a theory to try and prevent stopping out.

  - fixed fraction loss for portfolio is $500
  - average daily trading range of stock say in auz's case is 7.4 ticks - 3.7 up 3.7 down
  - buy on this ocassion is executed at 2 ticks above yesterdays close of $.078 therefore at $.080
  - therefore it is 5.7 ticks up from bottom of trading range (078 -.0037) = .0743
trade would go as follows 

                      $500 prepared loss
  divided by      $.0057   (trading range)

 equals 92592 shares that can be purchased that can trade down to bottom of trading range before being triggered by fixed fraction stop loss.

 Is this something new (probably)or has it been done b4 ? what r your thoughts?


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## tech/a (11 November 2006)

Constable.

Setting your stop and as such your risk can be calculated in 1000s of ways.
Yours is one way.

In AUZ's case the obvious stop is 1 tick below last Thursdays low..066
Risk is .007.or 72000 shares (by the way the $500 would need to be the trade risk not the portfolio risk or Portfolio heat.) This would be my way using Bar analysis.

*Portfolio heat * is the accumulation of risk on all trades in your portfolio if all were stopped out at the one time.If placing a stop in an arbitory fashion then Portfolio heat maybe an issue,as would the number of trades in a portfolio.
10 trades with a 5% total risk would be high.

But then we are beyond this discussion.


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## MichaelD (11 November 2006)

constable said:
			
		

> Is this something new (probably)or has it been done b4 ?



Setting a stop like this based on a stock's daily range is not new and indeed one excellent way to set a stop - but not necessarily so close to the daily trading range. You're approximately describing Average True Range which is a measure of recent stock volatility, and setting it this close would have something like a 30% chance (from memory) of being stopped out by random price movement. Will post more on a few popular stops including ATR soon.


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## nizar (11 November 2006)

tech/a said:
			
		

> In AUZ's case *the obvious stop * is 1 tick below last Thursdays low..066
> Risk is .007.or 72000 shares (by the way the $500 would need to be the trade risk not the portfolio risk or Portfolio heat.) This would be my way using Bar analysis.




tech,

whats your view about not setting your stop in an obvious place? does it really matter?


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## Bobby (12 November 2006)

tech/a said:
			
		

> With all due respect your work in progress is a great example of failure to implement a stop. (Yes I understand your methodology---and yes You know I think your snafoood re making 30% a year).
> By simply taking a 10% stop in your trades your profit would be dramatically different and your opportunity to allocate funds into working stocks IE profitable----would be dramatically enhanced.You have massive funds chewing up the profit gained in 40% of your trades.Its not working for you!
> 
> The benchmark T/T has achieved its 30% gains already for the year with a few stops along the way. Sure its open profit as your have open loses.
> If both portfolio's were sold Monday you have a nett return of 1.95%---- I 30% plus a bit.



Tech, 
I do agree with you about Duc's trading methodology, what I don't understand is why he chose this path, Duc is no fool ~   
Got to be an answer?


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## ducati916 (12 November 2006)

*tech/a & Bobby* 



> In my case and Michaels there is definately a quantitive known when applying a stop to a trading system.The results will be markedly different relative to the stop placement.Using T/T as the example stop placement from 10% of initial purchase to 20% will decrease number of times stopped.It increases nett profit.Increases Drawdown and Gives anything BUT a smooth equity curve.
> Cutting it to 5 % decreases everything but the number of times stopped and smooths the curve.In the end a balance is found I choose 10% as its easy but 8% is the optimum.
> The stop itself has nothing to do with the analysis and everything to do with Initial capital preservation, and maximisation of opportunity.




I can accept this, and having witnessed the results so far, it would seem to be a satisfactory compromise. The *stoploss* was tested along with entry and exit criteria and any other parametres that were additionally tested.



> Again they dont tell you that its wrong or right they are simply a line in the sand where YOU the analysis says at that point *I no longer feel my analysis is valid on this move. * See my AIM stop at 21.5c on that thread.The stop says nothing but price at 21.5c will say something to me. Price action beyond my sell if it comes to that will have no interest for me,other than possible further opportunity to do it all again. *If it goes to sleep then I lose interest very quickly*.




Stoplosses for the trader imply some fascinating psychological inputs.
Analysis, does not exist for a chart trader, hence the requirement for a stoploss. Chart set-ups are entry & exit triggers, traders should realize that no form of analysis is undertaken, nor required.

If a trader undertakes analysis, suddenly we introduce a psychological bias.
This psychological bias will at crucial times conflict with the theory of stoploss. With conflict we introduce *conflicted decision making*, which is a whole new subject area. In brief, it is this conflicted decision making that causes some of the blow-ups that traders [investors] encounter.

If it goes to sleep.................
Previously mentioned by tech/a was the concept of *Opportunity Cost*.
Opportunity cost ties in [psychologically] very closely with the idea of fast money. Fast money in the market is very alluring, but rather difficult to execute. The ubiquitous stoploss is in essence a tool designed to provide [in theory] fast money. It does so rather obviously by exiting you from trades that are not making money immediately, and placing you in trades that are.
That's the theory.

Quote:
I can think of two or three ways.


> All of them are superior to stoplosses.
> However, as you broached the subject, you can expand the discussion if you so care.
> 
> 
> ...




Quickly addressing the first point, which goes to the previous point regarding fast money, I as an investor, am as partial to fast money as the most avaricious trader, however, I am also after five years in the market also risk averse, and stoplosses represent higher risk than I am willing to bear.

What are the alternatives, and why is my public portfolio looking the way that it is?

First, the public portfolio is a reality check for all the newer market participants believing the hype from the peanuts [as is tech/a public portfolio]
There are not that many that post live trades, and, follow them through to their conclusion over longer periods of time.

TT has been running approximately 4yrs now.
Mine is at 11mths.



> By simply taking a 10% stop in your trades your profit would be dramatically different and your opportunity to allocate funds into working stocks IE profitable----would be dramatically enhanced.You have massive funds chewing up the profit gained in 40% of your trades.Its not working for you!




As previously mentioned, the idea is to have zero losses, hence the no stoploss model. To run over a three year time period, and to aggregate 30% compounded. Currently, I see no requirement to modify the plan.
This was not intended to be fast money, it was not designed to be fast money, it was designed to be safe, and reliable over all market conditions.

Market conditions play an important role in any methodology, and will change quite dramatically stoploss parametres.
TT will perform best in Bull markets, and possibly ok in a Bear, time will tell.
Mine, will perform in any market.



> The benchmark T/T has achieved its 30% gains already for the year with a few stops along the way. Sure its open profit as your have open loses.
> If both portfolio's were sold Monday you have a nett return of 1.95%---- I 30% plus a bit.




An interesting contrast.
TT has open profits and realized losses [10% stoplosses realized]
I have realized profits and open losses.

If the market corrects hard, as we had in May, TT's profits could shrink, my losses could grow. The outcome would be thus;

TT has stops hit, exiting trades, reducing profits.
I have increased drawdown, no action taken.

TT responds to market risk via stoplosses.
Market risk is irrelevant to my model, I evaluate economic risk.

Returning to the fast money paradigm.
The investment portfolio is one part of a diversified investment program.
Diversification in strategies becomes one of the *better* ways to manage risk than utilising a stoploss.

So what are [is] an alternative?

Again, as previously mentioned I am an Arb.
This suits my need for analysis [psychological weakness/strength]
It is risk free, which is far superior to a stoploss.
It is fast money, timeframes [holding periods as low as 2mins]
It generates 5%-9% per trade.
It can be massively leveraged [as it is risk free]
Profits fund my longer term investments.

LBO's
Currently trying to get on the ladder.

Bankruptcies.
Again previously mentioned.

jog on
d998


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## constable (12 November 2006)

Is this something new (probably)or has it been done b4 ? what r your thoughts?[/QUOTE]

 Sounds quite conceited ! Was actually ment to read "probably not"


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## noirua (12 November 2006)

Those who rarely use stop losses tend to suddenly start trading for the long term. We have all seen these posts after a stock suddenly falls out of bed. 

If you are a trader who needs a stick of dynamite to make you sell then a stop loss is vital. If you trade a reasonable number of shares then you can set different stop losses for each parcel of the same stock. 

One favourite method, which I am using with one stock, is to put in a selling price for different parcels. One parcel sold at $3.60 and the second at $3.70, and I have prices set all the way up to $4.50 in eight more parcels. All you have to do is state how many shares you wish to sell and the minimum price and the order remains for 28 days. If you keep on your toes you can vary or cancel at any time or and add trailing stop losses. Market depth often shows up the plans of some in less traded stocks but is harder to spot in the likes of the ASX 20. 

There are many variations of the above on buying and selling that can act in a bullish or bearish vein. The orders can remain either on or off screen.


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## ice (12 November 2006)

This debate is too esoteric for me. However I will make two comments.

1. However you evaluate and set stoplosses they are only relevant if if the trader follows through and executes them. Often not the case in traders I have spoken to.

2. Executing a s/l doesn't only protect capital, it also frees one from from the psychological stress of being in a losing trade. Freeing of this pressure generally permits traders to better evaluate and execute the next trade(s). At least that's my own experience.


ice


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## tech/a (12 November 2006)

> An interesting contrast.
> TT has open profits and realized losses [10% stoplosses realized]
> I have realized profits and open losses.




You have also locked in Tax at full rate. All of my most profitable trades have been held over 12 mths.All the little profits and little losses are at the normal tax rate.Tax is a definate issue that needs to be addressed by traders.



> If the market corrects hard, as we had in May, TT's profits could shrink, my losses could grow. The outcome would be thus;
> 
> TT has stops hit, exiting trades, reducing profits.
> I have increased drawdown, no action taken.
> ...




Very few of T/T's stops will be hit as few trades are in their infancy.
However T/T's EXITS could well be hit. Realising profit. If you place a 180day EMA of the LOW on all of those charts held for any length of time you'll notice that the $$s given back in a heavy correction are in relation to the trade minimal.

I never have to worry about initial drawdown to the degree a trader with no stop has to.

*The Fundamental case of NO STOP*

What amuses me is that a Fundamental analyst can and will be so wrong re the valuation of a stock yet so stubborn in thinking that he will sit through drawdowns that halve the value of the company invested in.

Now if a company halves in value from the time it is seen as UNDERVALUED then something is seriously wrong with the company---and I know nothing about it/them.

As it settles into a price that the market accepts I just cant see how todays valuation has ANY bearing on the valuation it was given by the analyst when it was twice its current price.

*SOMETHING FUNDAMENTALLY BASED * has to have happened for such a crash in price.Yet its ignored.

What you and other fundamental analysts here seem to be saying is that at no time can their fundamental valuation *or more to the point "PERCIEVED VALUATION"* alter or be incorrect. (Unless they are not holding the stock) It seems that once the stock is held then the Fundamental Analysis carried out sticks perminently to the stock---*if it fails then the Market has it wrong NOT THE ANALYST!*

Opportunity cost is massive let alone real profit erosion from massive drawdown.
This drawdown is very real.It has and does erode enormous amounts from open profit.



> CALL......$4.76........................$2.82...... ...................(-40.7%)
> SAFM......$26.45.....................$26.34....... . ................[0.0%]
> FORD......$10.74.....................$5.08....... .................(-52.7%)
> 
> ...




Lets allocate $10,000 a trade.

9 sold 32.3% av profit.---$29,070
Say 50% tax rate---$14535 nett.

12 losers $120,000 x 17% = $20,400.un realised loss

Of the 12 open trades only 2 are working for your portfolio.

{Honestly the illusion of profit is as obvious as the illusion of undervaluation in those which have decreased in price by 40% or more.} Sorry I just cant fathom this mentality although I understand what your attempting to do.

But as you can see your building a stable of losing trades.
If you were that confident of the method these now BARGAINS should be averaged down heavily---why arent you doing this? Why wouldnt you if your valuation was correct---then now its plainly rediculously undervalued!!. 

To not do this flies in the face of the initial analysis---does it not?

*In my view your work is the best example SUPPORTING STOP LOSSES.*

Yes duc I know what your attempting to do.---think your snafoood.

*But for all the flak you are one of the few willing to put your neck on the line.
Its pretty hard when it isnt performing---that in itself deserves respect.*

By the way T/Ts 30% is not Compounded.
If I was to add that component it has turned $100,000 to $390,000 in 4 yrs or 97.5% a year.
Add leverage (Margin) and thats 250% a year.ie $ original $30,000 now $320,000 after paying back margin loan.--(All Raw figures.)


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## constable (12 November 2006)

tech/a said:
			
		

> Constable.
> 
> Setting your stop and as such your risk can be calculated in 1000s of ways.
> Yours is one way.
> ...




 My calculation was with a portfolio of 100k using only .5% risk on one trade maximum loss of $500 on any on trade . (quite conservative)
95592 shares @ .08 cents total cost of $7407.36.
  Could place up to 13.5 trades at this price and the heat would be $6750 
or 6.75 % ... is that what you mean by heat?

I dont mind having close to a zero tolerance with losses but obviously will get stopped out more. last 2 weeks i ve placed 42 trades - 24 wins 16 losses with losses being 35% of win value.
 Thinking this method may be a little less conservative than my current style . Really i guess at the end of the day greatly depends on the quality of your stock selection  - mine for last 2 weeks have picked 63.6% winners . Short stops i know have cost about 6 trades or nearly 10 % more winners. 
I will try running with this method for a week or so .


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## tech/a (12 November 2006)

noirua said:
			
		

> Those who rarely use stop losses tend to suddenly start trading for the long term. We have all seen these posts after a stock suddenly falls out of bed.
> 
> If you are a trader who needs a stick of dynamite to make you sell then a stop loss is vital. If you trade a reasonable number of shares then you can set different stop losses for each parcel of the same stock.
> 
> ...




Nice idea.
You could and I have done the same thing with buys.


Each trade in the one stock has its own criteria.
How do you find brokearge,I find I have to have reasonable parcel sizes to make it profitable.IE 10K.

For instance a long held stock could have 4 buys in it all with different criteria.
I have heard of one or a few stocks becoming a specialist trading method in themselves.


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## tech/a (12 November 2006)

constable said:
			
		

> My calculation was with a portfolio of 100k using only .5% risk on one trade maximum loss of $500 on any on trade . (quite conservative)
> 95592 shares @ .08 cents total cost of $7407.36.
> Could place up to 13.5 trades at this price and the heat would be $6750
> or 6.75 % ... is that what you mean by heat?
> ...




Heat would be dependant on number of stocks in your portfolio and the risk in each stock if all closed at the one time.
10 stocks with .5% risk is 5% heat on portfolio---quite acceptable.

Your win rate is good and with a .5% stop loss would think youd have a good expectancy.


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## constable (12 November 2006)

tech/a said:
			
		

> Your win rate is good and with a .5% stop loss would think youd have a good expectancy.




Yes i can imagine you've seen many come and go under, hopefully will be here same time next year with 2400 wins and 1600 losses!


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## ducati916 (12 November 2006)

*tech/a*



> You have also locked in Tax at full rate. All of my most profitable trades have been held over 12 mths.All the little profits and little losses are at the normal tax rate.Tax is a definate issue that needs to be addressed by traders.




A valid point, however, your later assumptions are incorrect.
I am an Incorporated Hedge Fund in the Channel Islands [remember I'm British] and thus tax free. But tax is a very important area to be addressed.



> But as you can see your building a stable of losing trades.
> If you were that confident of the method these now BARGAINS should be averaged down heavily---why arent you doing this? Why wouldnt you if your valuation was correct---then now its plainly rediculously undervalued!!.
> 
> To not do this flies in the face of the initial analysis---does it not?




Which brings us directly to an alternative risk management tool, which is the AIM methodology. As such, I will average down on trades, and actively trade them where appropriate, I just have not bothered to post all the trade management involved partly due to the workload, partly due to the peanuts.
But in essence, AIM replaces the stoploss as a risk management tool.

As such, the posted results give a pretty close representation, or the worst case scenario that you could expect following a valuation methodology.
It is still early days yet, I still have two years before the methodology can be called into question.

jog on
d998


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## noirua (12 November 2006)

tech/a said:
			
		

> Nice idea.
> You could and I have done the same thing with buys.
> 
> 
> ...




The stock I have started selling is now over 900% up on its 2003 price and as you can guess has considerable value and makes it worthwhile selling in a number of lots.


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## Out Too Soon (12 November 2006)

noirua said:
			
		

> .
> 
> One favourite method, which I am using with one stock, is to put in a selling price for different parcels. One parcel sold at $3.60 and the second at $3.70, and I have prices set all the way up to $4.50 in eight more parcels.




That sounds like a good idea if you have enough invested. Thanks Noirua, I'll consider that in future.

I just started experimenting with stop losses last week, set them too close & found myself out of ZFX, KZL, CBH, AGS & JMS, all at a profit but of cause it was the wrong move because they're all up again.
I'll set lower, more varied & split stop losses in the future. The details of which, as yet, elude me.  

The hardest part of stop losses for a beginner is the tug of war between not wanting to lose to much gain & not wanting to lose to much gain.  
Hey! you know what I mean. :


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## nizar (12 November 2006)

noirua said:
			
		

> The stock I have started selling is now over 900% up on its 2003 price




Thats a good effort, well done


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## MichaelD (12 November 2006)

There are as many ways to set a stop as there are entry methodologies. I'll now talk about the functions all stops perform as a trade progresses.

Stops can be one of three things; an initial stop, a breakeven stop, or a trailing stop.

An initial stop is designed to protect your capital. It is the stop you set on trade entry. It is set at a point below your entry point at which you will accept that the trade is not going your way and it is time to get out of the trade with a small loss rather than watching it turn into a large loss. Basically, it is the point you set BEFORE you take the trade where you will accept that you are wrong about the trade.

As a trade progresses in your favour, at some point you will want to move the stop up to your initial entry point, making it a breakeven stop. At this stage, if the trade reverses and hits your stop you'll get out at approximately even.

Once the trade progresses in your favour further, your next goal is to lock in the profits that are accumulating. A very common newbie error is to watch a trade take off to the stratosphere and then watch it come right back down again without doing anything about it. A trailing stop  trails profitable price action, ensuring that if the trade reverses past the stop that you will exit with a profit.


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## tech/a (13 November 2006)

OR a time stop. Really for longer term trades.

Michael when would you move your stop to Breakeven?
Does the time/price frame alter for you within the timeframe traded?
Do/how do you consider position sizing at the time of placing a stop?
How does timeframe influence your stop?
Do you trigger your stop on violation or confirmation of violation of the stop?


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## MichaelD (13 November 2006)

tech/a said:
			
		

> OR a time stop. Really for longer term trades.



I haven't seen any evidence that proves a time stop for a long term system makes any difference to profitability. 

I'd be concerned that a time stop may in fact prove to be counterproductive, like so many other things, as it would take you out of a stock which is languishing in stage 1 and just about to break out to stage 2.

If there is any solid evidence that a time stop is beneficial, then I'm certainly interested in hearing about it.

For my short term system - a time stop is research in progress. In this case the postulate is that leaving a stock languishing between the initial stop and breakeven results in an opportunity cost due to the short timeframe involved.



			
				tech/a said:
			
		

> Michael when would you move your stop to Breakeven?
> Does the time/price frame alter for you within the timeframe traded?



Long term I use a trailing stop only, so that moves to breakeven in due course for trades that go my way.

Short term the simple answer is "as quickly as possible".



			
				tech/a said:
			
		

> Do/how do you consider position sizing at the time of placing a stop?



The other way round. I'll place the stop and then I'll position size based on where the stop is.



			
				tech/a said:
			
		

> How does timeframe influence your stop?



As above.



			
				tech/a said:
			
		

> Do you trigger your stop on violation or confirmation of violation of the stop?



On violation of the stop. That's what was backtested so that's what I trade. I want trades that go my way, not ones that might go my way if I give them another chance.


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## nizar (13 November 2006)

tech/a said:
			
		

> In AUZ's case the obvious stop is 1 tick below last Thursdays low..066
> Risk is .007.or 72000 shares (by the way the $500 would need to be the trade risk not the portfolio risk or Portfolio heat.) This would be my way using Bar analysis.





tech,

whats your view about not setting your stop in an obvious place? does it really matter?

Michael as well please

(maybe you guys didnt see this post from a few days ago)


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## emma (13 November 2006)

Trailing stops for short term trades - this is my conundrum at the moment as I have recently had two trades with good open profits, stopped out at a much lower price.  What methods do forum members use to protect their profits on short term trades?  Thanks Michael for starting this thread.


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## Burnham (13 November 2006)

emma said:
			
		

> Trailing stops for short term trades - this is my conundrum at the moment as I have recently had two trades with good open profits, stopped out at a much lower price.  What methods do forum members use to protect their profits on short term trades?  Thanks Michael for starting this thread.




Beat me to it Emma, same question here.

"plan the trade " =  stop on entry @ 10% and trailing stop of 10% from highest close thereafter.

10% can be tight especially on low issue stock or sub 50c type trades where a few trades down can take you out - this applies more particularly to the trail rather than entry. (eg; STX & AKK trail stops taken out today - both remain attractive fundamentaly ( in my view ) but "trade the plan" .... grrr !

Have looked at application of  trail % kicking in only when X % target reached after entry to adjust for false breaks down but the KISS principle is resistant.

Yes you can re-enter but the dynamics of the trade have been altered.

Have tracked the threads on this board looking for the ideal - the above seemed to be the best compromise .......?

Would welcome comment.


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## tech/a (13 November 2006)

> tech,
> 
> whats your view about not setting your stop in an obvious place? does it really matter?
> 
> ...




Sorry just saw it.

Thats a good question. In shorter term trades this is more important than longerterm.
I can set a stop and justify it in many places.Support/Consolidation a recient low in any timeframe.
The stop is purely for me in shorter term trading my minimisation of risk.
I want a trade going my way as soon as I get on.
I set a stop in the most obvious position and use (Generally) EOD charts to see if the stop is too far away (as an obvious stop) I do pass up many possible trades due to to wide a stop. I used to do smaller position sizes and see how they go but now pass them by completely.---some go others dont.



> Trailing stops for short term trades - this is my conundrum at the moment as I have recently had two trades with good open profits, stopped out at a much lower price. What methods do forum members use to protect their profits on short term trades? Thanks Michael for starting this thread.




My view.

If a stock has moved 30%+ in a day OR 50% + in a few days and your on it then have a tight trailing stop.I like the previous days high if a gap open and the 

If a stock is moving slower then use an exit such as Old Support.
Trailing stops should be used only for very fast moving spikes,to maximise profits.
Chances are you'll never get the timing perfect.Never lament what could have been,make the decision to the best of your ability and DO IT!

Then next trade do exactly the same---every now and again--Perfect!

Perhaps you can give me an example of how a trade went for you?
A chart would help.

Here is one of mine which may help explain what I do.


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## MichaelD (26 November 2006)

In previous posts, I outlined the reasons you should trade with a stop and the basic functions of stops at various points during a trade.

In the next few posts, I'll discuss several common methodologies for setting stops.

We'll start with a stop based on Average True Range (ATR). I'll admit to some bias first. I use an ATR stop exclusively for my long term trend trading and think it is the best of the long term stops.

You don't really need to know the fine details of how ATR is calculated, but if you want the nitty gritty, Investopedia describes it well here; http://www.investopedia.com/terms/a/atr.asp. The key point of the ATR is that it takes into account the volatility of an individual stock, so for very volatile stocks an ATR-based stop is further away than it is for less volatile stocks. The nett result is that you are less likely to be whipsawed out of a position than if you used a more arbitrary stop method, such as a fixed % stop.

ATR stops have 2 variables;
1. The time period over which the ATR is calculated. Commonly, they are calculated over 10 or 14 periods. I don't have an opinion on which is better so long as you are consistent.
2. The ATR multiplier. How many times you multiply the ATR to get your stop. Many trading books advocate using a 2.5 - 3.5 ATR stop for trend trading, but based on backtesting this is too close a stop. To really capture long term trends which run for years requires a wide stop, more of the order of 6.5 - 7.5 ATR.

Calculating an ATR stop is a bit tricky. Whilst ATR is native to MetaStock, a trailing stop based on it isn't. I am aware of 3 ways of coding this sort of stop;

1. Using this formula (taken from the TradeSim manual, but also readily available on the 'net if you search for it);

	Period:=10; { ATR period }
	ARC:=3.0; { Average range constant-note this is set to 3xATR whereas I recommend higher}
	Stop:=C-ARC*ATR(Period);
	BandLong:=If(L<=PREV, { is stop reached?}
	Stop, { yes: restart plot }
	If(Stop>PREV, { no: if new stop>prev stop?}
	Stop, { yes: plot new higher stop }
	PREV) { no: plot previous stop}
	);
	BandLong;

2. Purchasing TradeSim. TradeSim contains an add-on formula for quickly calculating and displaying an ATR stop which is invaluable for backtesting. (The above function is quite slow to use for backtesting purposes).

3. Using a plug in indicator developed by Richard Dale which can be downloaded from here; http://www.tradernexus.com/advancedstop/advancedstop.html. It's free and it's fair dinkum.

Following on from this, I'll post 3 charts along with commentary on how the ATR stop works.


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## MichaelD (26 November 2006)

Example 1: KZL. A 6.5 ATR stop would have kept you in this uptrend since June 2006 and would not yet have signalled an exit despite the recent price volatility.


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## MichaelD (26 November 2006)

Example 2: CER. This is a great example of a whipsaw, where the 6.5 ATR stop was hit and then the price immediately reversed. This can and will always happen with any form of trailing stop, no matter how you set it. There is nothing stopping you from re-entering such a position if you get another entry signal, but the whole point of rigidly following a stop will be shown in the next chart.


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## MichaelD (26 November 2006)

Example 3: BCL. Here is a classic example of how a trailing stop will save your capital from oblivion. The trailing stop was hit at 5.00 and the share price just kept on going south. if you hadn't exited, you would have wiped out the vast majority of the capital in this trade (the last traded price was 0.335).


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## Bobby (26 November 2006)

Anyone use  stops to reverse trade ?

E.G. Your long a 1000 X** shares at $20.00 , you set a stop at $19.00 to sell 2000 so  you are now on the new direction with a 1000 X** shares short .   

Bob .


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## It's Snake Pliskin (26 November 2006)

Hi Bobby,
How are you going of late?
In forex a signal to sell can be treated as a signal to go short or vice versa.
Applying this to CFD'S would be just as practical.
Of course going short when one has wanted to go long is not always an option. There could be better long oppotunities elsewhere after stopping out.

Hows this:
Paper trade the direction you DON'T want to go and when it fails take a trade in the opposite direction. It is like a validating filter of such. 

Have fun.
Snake :bounce:


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## Bobby (26 November 2006)

It's Snake Pliskin said:
			
		

> Hi Bobby,
> How are you going of late?
> In forex a signal to sell can be treated as a signal to go short or vice versa.
> Applying this to CFD'S would be just as practical.
> ...



Greetings Snake,

Hope all is well, as it is with me.

The reverse trade is a aggresive play for sure, as you said there are certain applications that suite it    

I think its best for intraday .
Looking hard at it now for future trades.
Just like the concept   

Having Fun
Bob.


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## MichaelD (3 December 2006)

Long Term Moving Average Stops

Moving Averages are a time-honoured indicator, acting to smooth out the day-to-day chaos of price action. As the name suggests, it represents an average of past price action. This indicator is built into all charting packages and has a series of parameters, the most important of which are;

Time periods - the length of time over which the moving average is calculated. Longer time periods stay in trends for longer but are less responsive to price action. Shorter time periods are more responsive to price action, but tend to whipsaw more.

Method - in an attempt to overcome the lag inherent in a moving average, there are various weighting methodologies applied to the data. A Simple moving average just averages the price out over all the time periods equally. An Exponential moving average gives greater weight to more recent data in the average.

Price field - HIGH, LOW, OPEN, CLOSE - the price field on which the moving average is calculated.


The biggest strength of a long term moving average stop is also its biggest weakness. It is only very slowly responsive to price action, so it tends to ignore most insignificant price movements and is thus very resistant to whipsawing. The price for this, however, is that it will give back quite a lot of profit at the end of a trend.


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## MichaelD (3 December 2006)

Example 1: KZL

This chart has been marked with the TechTrader exit, which consists of a 10% initial stop and then a 180 EMA calculated on the low. You'll note that the exit withstands the whipsaw in May 2006 which the previously demonstrated 6.5 ATR exit did not. However, the exit is a long way from the current price action (current price 7.20, exit at 4.95), demonstrating the considerable profit giveback of this exit.


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## MichaelD (3 December 2006)

Example 2: CER

Again this chart has been marked with the TechTrader exit. As with the ATR exit, this is a good example of a whipsaw, inherent in all systems with a price-based exit.


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## MichaelD (3 December 2006)

Example 3: BCL

The most important task of an exit is to cut your losses short. This is well demonstrated with this trade.


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## spitrader1 (3 December 2006)

Bobby said:
			
		

> Anyone use  stops to reverse trade ?
> 
> E.G. Your long a 1000 X** shares at $20.00 , you set a stop at $19.00 to sell 2000 so  you are now on the new direction with a 1000 X** shares short .
> 
> Bob .



interesting point bobby. its a question that has been debated on the SPI forum as well. In my experience, and ive only done it twice because it was a  mistake, but I have put a position on, taken profits, and then gone the other way when i forgot to take my stop off. On both occasions when i realised my error, i made more money than the original trade!!


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## happytrader (12 March 2007)

Basically, well placed stop losses and profit targets keep the trader from being strung along or dragged about by the nose, thereby freeing up capital and psychological resources to find another opportunity.

Cheers
Happytrader


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## forexdiscussion (25 January 2011)

MichaelD said:


> Q: Why should you use a stop?
> A1: Because you'll make more money more consistently by using a stop than by not.
> A2: Because you'll preserve your capital whilst you're learning how to trade.
> 
> ...




Stop loss is just like having an insurance, it can't stop the pain but it will help you to survive and trade for another day.

Happy trading!!!


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