# Tails and the Art of placing stops



## nizar (6 March 2007)

Hi all,

Just wanted other peoples opinions on placing stops outside the market when trading _long term trends_.

I've been thinking about this because time and time again I've seen tails (as seen on candlestick charts) force me and others I know to be stopped out of the market, but then the stock recovers by the close and continues in the uptrend.

The risk with that set-up means that you wont be first out the door in a black swan event, but I think this risk would be more than offset by the additional gains from letting the winners run and in less transaction costs.

Thoughts?

An example today with EVE. Went as low as 26c. Now has recovered to 30c.


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## theasxgorilla (6 March 2007)

If your system is forgiving enough to allow you exit based on a daily close below your stop then you may avoid tails that form during the course of a day.  You won't escape tails that form over a period of two or more days.

If you trade highly leveraged instruments like CFDs then you probably just have to accept that a tail will trigger a stop and wear it.  Look for another setup to re-enter if the tail doesn't invalidate the view that you've taken.


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## MichaelD (6 March 2007)

A long term trend following system using intraday stops is less profitable and suffers more drawdown than the same system traded with an end of day stop.


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## nizar (6 March 2007)

Thanks for the input guys.
Gorilla - nah not CFDs just straight stocks.

Any1 else care to add an opinion?
tech/a ?


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## tech/a (6 March 2007)

Actually I agree with BOTH ASX and Michael.

Particularly ASX's point about CFD's could be a big problem.

Let me say this.

Take care of RISK and profit will come.
I'll take a guess in your case.
Your position is so heavy that you need to place a stop very close to stop catastrophic loss.

I'd do 3 things all in conjunction.

(1) Widen your stop and use fixed fractional P/S to buy your parcel.
(2) This will cut down your position size.
(3) Move stop up once 2xR/R and let profits run.

Think its going to be more difficult to find long term movers for a while.

Example.

Risk $500.
Stop 5c 
10000 stocks can be bought.
Risk $500
Stop 15c
3333 stocks can be bought.

Further lets say your Total Capital is $20,000.
and you wish to spread risk over 3 stocks at anyone time.
$7000 approx each
If the stock above is $1 then 10000 of them means your portfolio risk is overheated.
So you buy the maximum you can with the $$s available and take LESS RISK.
Keep the TOTAL to under 2%.
Positioning of your stop should be at a point where your analysis for a long (OR short trade is OBVIOUSLY wrong).

The position of the stop WILL determine value of the risk. Then do the maths.
I'm sure you can see where I'm coming from and do the maths.

Now if your trading CFD's Whatever your risk is calculate it by leverage taken.
10:1 leverage---a 2% risk is now 20%.


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## nizar (6 March 2007)

tech/a said:
			
		

> Actually I agree with BOTH ASX and Michael.
> 
> Particularly ASX's point about CFD's could be a big problem.
> 
> ...




Thanks tech but we've gone through this before, youve taught me fixed fractional postion sizing and im in fact taught it to a few of my good friends.

Iv always been applying it.

I cashed out a few days ago so no problems like this:

_I'll take a guess in your case.
Your position is so heavy that you need to place a stop very close to stop catastrophic loss._

LOL im not that much of an amatuer anymore!

Entries and position sizing havent been a problem for me.
Its exits, which are the most important component of a profitable trading system, that im having trouble with.

Like when to move up the stop, to what level? Do i leave it out of the market to avoid tails (intraday noise)?

Tech can you answer my question more directly please (the one from the original post). I know you have a very profitable systems that trades long term trends and im very interested in how you place stops for those stocks and also exits.

Many thanks.


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## tech/a (6 March 2007)

I'll post up a chart thet will hopefully help tommorow morning.

I'll use EVE as an example.


Stops in the Trading system (any trading system) are by nature often different (and fixed) than those used in discretionary trading.
Trading systems are sets of numbers which return a positive expectancy if adhered to.Provided market conditions dont fall well outside those used in the test period.

See you tommorow.


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## theasxgorilla (6 March 2007)

To continue down the path of discussion regarding CFDs.

Due to the forced margin situation with CFDs they don't lend themselves so well to being used with long term systems.  So you trade them shorter term and as with many short term systems your win/loss ratio can be lower, but R is also lower, so you should in theory be able to sustain more losses and when you latch onto a winner it should bring you higher R-multiple profits.  The reverse can be true to losses, so you must execute when they're hit.  The trading platforms make this a no-brainer as you can set stoplosses to trigger automatically.  Half the pscyh battle with trading high leverage instruments is won this way, as far as I'm concerned.

Regarding long term trading systems and tails and stops etc. please take a look at the attached chart from BEN.  It's the only position that I've sold so far during this pullback, and believe me, I didn't want to sell the company.  I sit next to a _fundamental_ investor at work, and all he talks about is how good BEN is (at the right price, of course).  Yesterday the share clearly, CLEARLY, penetrated and closed below a significant low.  In fact, it closed below it for the day and this was my exit trigger.  The pre-arranged plan was to sell at open today and so I did.  Can you see today's closing price?

I think with a 7% (approx) drop in 5 trading days that having some stops triggered on longer term positions is par for the course, particularly lower liquidity, Small Ords constituents like BEN.

If there is something else I could have done, I'm all ears (and eyes).


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## tech/a (6 March 2007)

*Nizar* are you talking about being stopped on your INITIAL stop placement or during the trade.---Trailing stop or Exit being triggered early--in your view?

*ASX * 
My view was you were trading a retracement move so were likely to have it pullback on you.If in fact you started trading at or around the low used as a stop.

If not its just a normal exit using the low as a trailing stop.
Although you could have recognised that this was a corrective move and sold on the first pullback from the recient high.

Dont think you'll be that un happy as time goes by!.


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## nizar (6 March 2007)

tech/a said:
			
		

> *Nizar* are you talking about being stopped on your INITIAL stop placement or during the trade.---Trailing stop or Exit being triggered early--in your view?




During the trade.


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## theasxgorilla (6 March 2007)

tech/a said:
			
		

> My view was you were trading a retracement move so were likely to have it pullback on you.If in fact you started trading at or around the low used as a stop.
> 
> If not its just a normal exit using the low as a trailing stop.
> Although you could have recognised that this was a corrective move and sold on the first pullback from the recient high.
> ...




Thanks Tech.

I'll do the usual post mortem on it as I'm sure there is something I could have improved.


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## nizar (6 March 2007)

And also tech/a and MichaelD if you were to enter EVE now, where would you put your stop?

With Michael probably the standard 6.5ATR.
And you tech ?

You probably wouldnt want to go long anything now but keep in mind its still in a clear uptrend, just near the bottom end of its trading channel.

Or even better, say you entered EVE when it first closed at 20c, where was your initial stop, and at which point did this move and to what position?
Would you have got stopped out when it then went down to about 17c not long after it hit 20c?

Thanks guys for taking the time.


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## MichaelD (6 March 2007)

nizar said:
			
		

> If you were to enter EVE now, where would you put your stop?
> 
> With Michael probably the standard 6.5ATR.



This is a vexed question since EVE isn't in my long term trend following universe, so it wouldn't appear in any entry scans for that system.

However, yes, if it were in that universe and I were to trade it long term trend following, I'd use a 6.5 ATR stop which is at 22.7 (=close below 22.5).


			
				nizar said:
			
		

> You probably wouldnt want to go long anything now but keep in mind its still in a clear uptrend, just near the bottom end of its trading channel.



It's not giving me an entry signal today, but through the entire run up has given multiple long term entry signals, the most recent one of which was on the 27-Feb.



			
				nizar said:
			
		

> Or even better, say you entered EVE when it first closed at 20c, where was your initial stop, and at which point did this move and to what position?
> Would you have got stopped out when it then went down to about 17c not long after it hit 20c?



I don't use an initial money management stop. I just trail a 6.5 ATR stop and use that as both the initial and the trailing stop. There is fairly good evidence that I could improve my system by putting in a tighter money management stop but I can't backtest this due to TradeSim limitations so I don't trade it.

A 6.5 ATR stop would have started at around 11.75 (=close below 11.5) cents and trailed up from there so wouldn't have been taken out by the 17 cent close.

ps That's a very nice trend there.

pps If you're thinking about doing it, don't change your plan for the trade mid-trade. It almost invariably ends in tears.


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## MichaelD (6 March 2007)

theasxgorilla said:
			
		

> Yesterday the share clearly, CLEARLY, penetrated and closed below a significant low.  In fact, it closed below it for the day and this was my exit trigger.  The pre-arranged plan was to sell at open today and so I did.



*GOOD TRADE.*


			
				theasxgorilla said:
			
		

> Can you see today's closing price?



It's still a GOOD TRADE. Sure a few of them will do this (and test your psyche in the process) but more of them overall will tank further, taking your precious trading capital with them. It's all about the big picture - following your plan and limiting your losses/preserving your profit will mean you end up with more money in your pocket at the end of the day, and that's what it's all about - the bottom line, not how often you're right.


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## nizar (6 March 2007)

Michael, many thanks for your response.

I have alot to think about.


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## It's Snake Pliskin (7 March 2007)

Nizar it is not a trade for me. Look at the previous weeks and the signs showing get ready. When it broke 30c it said I'm exhausted but kept going offloading some sellers in the process - since then choppy.

Volatility has ruled the roost recently expect to get chopped in half.


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## nizar (7 March 2007)

Thanks for your feedback SNake.

Michael - im really liking your system in how its truly mechanical. No reading charts to determine support levels to place the stop under them, simply 6.5ATR, is the initial stop, the trailing stop (as it follows the sp) and also the exit. Too easy, but as i have been told many a time, often the most simple systems are the most profitable.

No room for human emotion here. I think you may have found the holy grail.


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## MichaelD (7 March 2007)

nizar said:
			
		

> Too easy, but as i have been told many a time, often the most simple systems are the most profitable.
> 
> No room for human emotion here. I think you may have found the holy grail.



A question for you more directly related to finding your holy grail - I'm sensing that you are dissatisfied with your trading system...why?


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## tech/a (7 March 2007)

MichaelD said:
			
		

> A question for you more directly related to finding your holy grail - I'm sensing that you are dissatisfied with your trading system...why?




Nizar.

I'm afraid I'm with Micheal on this one.
Remember its not about HOW or WHAT you trade
Its ALL about the NUMBERS.

You'll rarely get perfect Entries or Exits.
But what you can and should get are the numbers related to the way your trade.

If you have a low Expectancy you would expect to have a high win rate.(Shorter term methods)

If a low Win Rate you would expect a higher expectancy.(Longer term methods).

Micheal.
I'm of the opinion that we may see longer term trading methods like Techtrader Under perform as the Bullmarket--steadies or turns Bearish.
Time to add another string to the Holy grail!!

*In the end occurences like tails and even last week and the coming weeks will have little impact.*


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## nizar (7 March 2007)

MichaelD said:
			
		

> A question for you more directly related to finding your holy grail - I'm sensing that you are dissatisfied with your trading system...why?




Yes.
Because i get stopped out too much, too often.
This is because my exits and stops are too discretionary and i dont have enough of a knowledge or background to apply technical analysis proficiently.

Truly mechanical systems, like your long term trending system, on the other hand, do not rely on any sort of analysis.

I thought or used to think that such a wide stop like your 6.5ATR would result in too much profit giveback as you yourself have identified, but maybe in the long-term its the most profitable way than a tighter ATR based stop.

As a result of your stops/exits; Were you stopped out of all your longs during May?
Did you end up exiting near the lows?

I really need to do some backtesting bad.

Another question for you; is your entry (closed on all time high) based on a true all time high? ie. how about a high for the last 5rs, coz stocks like that can still run if the broken overhead resistance was significant eg.MLS at 4c.

And one more: i would imagine during the last 12-18 months you would have received more entry signals than your trading capital would allow, so how do you choose which trades to take?

Do you look at volumes?
Liquidity?
Share price between a specific range?

DId you do some sort of MonteCarlo analysis so any combination of trades taken (when the system was backtested) would been profitable?

Yeh like i said i need some software bad.

Thanks for your help.


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## tech/a (7 March 2007)

> Yeh like i said i need some software bad.




*No you dont!*

You can do it without software.
Mind you you'll learn more than you can imagine designing methods with software.

Dont think for one minute that profitability is exclusive to systems traders!


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## theasxgorilla (7 March 2007)

Nizar,

I can only tell you what I do and perhaps it helps.  My trading method is discretionary and longer term...a position could be open for anywhere between 6 and 18 months.

On a given share I find the maximum distance travelled from peak to trough during an up trend.  When I set a stoploss, initial OR trailing, I factor this in.  If the maximum distance travelled from peak to trough during an up trend is 12% then I set two stoplosses...one is discretionary, the other is definite.

The discretionary I would therefore set at 12% and MAY execute on one daily close below at market open of the following day.  The definite stoploss I will set at 15% and (should) execute no matter what.  The definite stoploss is used to determine position size based on putting 2% of trading capital at risk (FPS).

In the example that you gave, EVE, the peak to trough distance travelled during an up trend can be as much as 25%.  This means that if you entered at 21 cents you would have to set a stoploss at 16 cents to be just outside the noise.

If you trade these very low priced, low liquidity shares then this is par for the course.  Your stoplosses need to be wider due to the inherently higher volatility and due to the lower liquidity tails are more prone to forming, particularly during the sale of larger positions.


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## MichaelD (7 March 2007)

nizar said:
			
		

> As a result of your stops/exits; Were you stopped out of all your longs during May?



Last May I wasn't exclusively using a 6.5ATR exit. I actually tailored the exit to the last 12 months' price action, so I'd use anything from a 4.5ATR to about a 6ATR exit. I was stopped out of about 1/2 my longs.


			
				nizar said:
			
		

> Did you end up exiting near the lows?



For about 1/2 of the stopped out positions, yes, the exit corresponded with the low. However, looking at the exits as a whole in retrospect shows quite clearly that I was far better off taking the exits than not.


			
				nizar said:
			
		

> I really need to do some backtesting bad.



Backtesting is a very powerful tool to give you the confidence to stick with your trading rules.


			
				nizar said:
			
		

> Another question for you; is your entry (closed on all time high) based on a true all time high? ie. how about a high for the last 5rs, coz stocks like that can still run if the broken overhead resistance was significant eg.MLS at 4c.



I don't actually use an all time high entry as it's a fairly high drawdown entry. This is my entry filter;

CLOSE>Mov(CLOSE,175,EXPONENTIAL) AND H>Ref(HHV(H,2),-1) AND CLOSE>OPEN

1. Close above a long term moving average
2. Highest high value for 3 days
3. White candle

That's it. To date, I haven't found anything else that significantly improves the end result. To be honest, I'm not looking (see later in this reply).


			
				nizar said:
			
		

> And one more: i would imagine during the last 12-18 months you would have received more entry signals than your trading capital would allow, so how do you choose which trades to take?
> 
> Do you look at volumes?
> Liquidity?
> Share price between a specific range?



Yes, this filter produces many trading signals for my universe (ASX300). I simply started at the letter A and bought until the money ran out. As trades got stopped out, the funds went either to pyramid trades or to new trade signals. I'm now left with 1/2 "legacy" trades which weren't stopped out in May and 1/2 early alphabet trades. There is no performance differential between them. More often than not, the worst looking charts on entry are the ones turning into the biggest winners.


			
				nizar said:
			
		

> DId you do some sort of MonteCarlo analysis so any combination of trades taken (when the system was backtested) would been profitable?



Yes, I extensively MonteCarloed the system on all sorts of universes including some quite hard to construct ones. It was 100% profitable in all runs, a mandatory condition before I would trade any system.

A few further points I'd make;

1. All you need for consistent results is one or more systems that you know are profitable and that you have absolute confidence in so that you trade them consistently. How one gets to this point is individual. For me, this journey required TradeSim and a mechanical system.

2. Once you have absolute confidence in the profitability and consistency of your trading, then it is time to look at how to improve results in other ways (eg pyramiding/scaling in, leverage, other systems). This is where the real differences to your bottom line can be found, not in tweaking entries.

3. Psychology is truly the key-we are our own worst enemy. I was just recently congratulating myself on how long it has been since I made a trading error (= break system rules) and guess what, I just managed to screw up a gift of a trade in this market (WMT) by ignoring my rules in the heat of the moment. D'Oh!


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## motorway (7 March 2007)

Getting stopped out is also a function of where you are entering..

Buying at the supply line ( The upper trend line where supply is entering )
IS going to be a different experience to buying at the demand line ( where buying is entering )

Look at the waxing and waning of the volume as the trend unfolds

notice the Volume drying up at as it approaches the lower line
and then moves in harmony as the trend continues..

The points where the volume drys up are the points the selling waves were exhausted ... If the selling is exhausted you are probably not going to have trouble getting stopped..

Not maybe what you are looking for ( does require judgment )
mechanical Vs Discretionary.... But discretionary can be objective and methodical...


Ok Look at the Volume Now.... That clear earlier pattern has changed
selling has not exhausted so far... This suggests the angle of the trend will change and/or it's direction..

Markets react naturally as a trend unfolds.. Being stopped out too often means you are out of step with that natural rhythm

motorway


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## It's Snake Pliskin (7 March 2007)

nizar said:
			
		

> Yes.
> Because i get stopped out too much, too often.
> This is because my exits and stops are too discretionary and i dont have enough of a knowledge or background to apply technical analysis proficiently.
> 
> ...




Nizar,
Don't get frustrated with it. losing is part of the business. It is the long term effects that count. 

Try to be conservative WITH WHAT you buy. WHY is it worth the RISK? What is in the background that warrants a purchase?

I believe stops are a tricky tool to set. They do what they are called which is why I ask the above.
I am referring to initial stops. 
Take time out and refocus on your mission.
Snake

Read motorways post above mine.


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## theasxgorilla (7 March 2007)

Very cool post 'motorway'....I'm digging this volume analysis stuff.

The ASX Gorilla.


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## nizar (7 March 2007)

Thanks for the advice every1.

Tech/a - Just one question: where do you set your stop for your long term trending system? Below the 180dma?

Seems like an excellent place to a put a stop, wouldve kept you in PDN and ZFX and i mean the whole trend going back 3 years.

Michael - Thanks for your response. Yeah actually its not just my stop but exits in general are too discretionary for my liking. Id prefer it to be more systematic.

And dont mention WMT to me, please.   

Snake - Good points. Yeh a stop is there to its job, but it must be placed in a strategic place so that the stop being hit means that the trend has changed ie. you dont want to be holding this because the reason you bought the stock is no longer there. Obviously you know all this, but yeh just reminding myself...

And also (though off topic) - is there always an equities bullmarket somewhere in the world?
Any stockmarkets out there in a bearmarket right now?


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## MichaelD (7 March 2007)

nizar said:
			
		

> And dont mention WMT to me, please.



When the trade's over, win, lose or draw, I plan to write this one up as a great example of what not to do. Classic errors that I haven't made in a long time.

Oh well, at least I'm on the right side of the seemingly invincible WOW with a fully pyramided position (CFDs - even sweeter that most of it's not my money). It dwarfs any short term silliness.


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