Stop loss percentages

[mrWoodo]

Hi, curious to see how other people decide their stop loss percentage?

Is it as simple as say 8% across the board, or do you base it on the industry (eg say more volatility in resources so allow for a bit more). What about different categories like asx20, asx50, etc - The more 'bluechip' the category, the less percentage stop to use? (And also, if trading small amounts < $5k do you take into account the commissions - From looking at the NAB online trading page theres a $9.95 - $14.95 additional charge when using stops - eg. If I set it to 8% and it stops, I'm really losing more like 10% on a small trade when the commission is deducted).

I haven't used stops so far, but after a few stuffups I want to have them in place, but indecisive on what %age I should work with. I'm thinking 8% for my mostly short/medium term trades.

Thanks,
Woodo

 

[reece55]

In general, I try not to risk more than 2% of my total trading capital on any one trade. So rather than a set percentage for a stock, my focus here is capital preservation here rather than the individual stock selection.

However, in saying that, this may vary a little bit. For instance, this may be smaller on a very short time frame on a set-up for a trade. And for very volatile stocks (something like say ZFX), I may allow myself a little bit of room.

However, in aggregate, 2% of total trade capital is usually a good mix IMO.

Cheers

 

[mrWoodo]

2% of total sounds good, thanks Reece

Whoops, have found another few threads v similar, sorry if I'm rehashing the same ole stuff, link here

 

[Realist]

Trading is an art, not a science.

There is no right way to paint a picture, or to create a sculpture, and there is certainly no right way to determine a stop loss.

You need to think for yourself. If you do what everyone else does the best you can do is the same as everyone else,and you will never get ahead in life.

Preserving capital sounds lovely, and is important, but there is nothing more frustrating than getting stopped out of a winning trade because of a minor fluctuation. The tighter your stops the more often this happens of course. You need to find your own balance that you are happy with.

But to add some advice - if you buy a solid company like CBA or Fosters as a trade (which is probably unlikely) - you do not need a stop loss in my mind.

If you buy a speculative diamond explorer, I'd have a tight trailing stop loss, maybe a 3%, and jump at the first hint of danger. In other words Fundamentals matter, you do not need to be an expert on company reports, simple logic will tell you a bank is in most cases safer than a diamond explorer.

 

[Sean K]

Trading is an art, not a science.

This is why traders fail IMO.

When subjectivity comes into it, it is bound for the dog heap.

Unfortunately, I am still subjective about investing......... The sooner I leave emotion at the door, the better outcomes I will have. As in life.

 

[Realist]

This is why traders fail IMO.

When subjectivity comes into it, it is bound for the dog heap.

Unfortunately, I am still subjective about investing......... The sooner I leave emotion at the door, the better outcomes I will have. As in life.

Well mate, if it is a science what is the answer then?

What stop loss percentage should one use for all of their trades?

My answer is "it depends, it is subjective, use your brain, think!!"

What is your answer?

 

[reece55]

Kennas
Whilst I believe the majority of traders fail, there are some that make a good living from it. There will always be a portion of subjectivity when it comes to interpreting a particular chart in the anticipation of a particular move. Rather than say traders fail, I believe most lose significant capital because they do not concentrate efforts on minimizing loses - IMO, the most important attribute a trader/investor can learn is when to call it quits - I always have a stop on each trade I enter and stick to it religiously. Then, with every setup, I look for a risk/reward ratio of 1:3, meaning that to break even I am only looking for 1 in about 2.8 trades to pay off to break even (the .2 is transaction costs). To me, there is no in between here - establish your stop loss and if it is hit, get out then. The market is brutal to those who display fear.

Cheers
Reece

 

[Realist]

How often do you get stopped out of a winner though Reece?

What was the last stock you got stopped out of?

Say on the trade you lose 6% plus 2% brokerage on a stock that then rises 50%. You're down nearly 60% versus another more 'thoughtful' trader who held, just cause of your rules.

It'd do my head in.... And it happens all too often.

 

[Sean K]

Well mate, if it is a science what is the answer then?

What stop loss percentage should one use for all of their trades?

My answer is "it depends, it is subjective, use your brain, think!!"

What is your answer?

Yes, that is why you are not a trader. It is also why I am predominatley an investor also.

I am currently a discretionary trader, waiting for opportunities and make the most of them. I actually don't have to trade to be quite honest, but I enjoy it.

While you are an 'artist' in the share trading game, I think you will ultimately fail if you trade without a plan..... Good luck.

 

[Sean K]

Kennas
Whilst I believe the majority of traders fail, there are some that make a good living from it. There will always be a portion of subjectivity when it comes to interpreting a particular chart in the anticipation of a particular move. Rather than say traders fail, I believe most lose significant capital because they do not concentrate efforts on minimizing loses - IMO, the most important attribute a trader/investor can learn is when to call it quits - I always have a stop on each trade I enter and stick to it religiously. Then, with every setup, I look for a risk/reward ratio of 1:3, meaning that to break even I am only looking for 1 in about 2.8 trades to pay off to break even (the .2 is transaction costs). To me, there is no in between here - establish your stop loss and if it is hit, get out then. The market is brutal to those who display fear.

Cheers
Reece

Hi Reece,

I actually think that what you have described above is science, not art? This is a documented trading plan, not for interpretation.....

kennas

 

[reece55]

Agreed Kennas, my personal trading style uses stats. Sorry if my post was vague - I do not support an artistic trading system. I prefer not to use a purely discretionary method, tried that once when I was younger in about 2000 - 2001 - needless to say I learnt my lesson the hard way. As with any investing IMO, there is no room for art. If you want to be artistic, become an economist!

Realist, the last trade I was stopped out of was KIM - in at .875 and out at about .86 because the stock hit about .83 from memory. When you say I am down 60% from a thoughtful trader, you are not looking from my view here. As I have said, I believe the minimization of losses is more important than potential profits - you will learn this if you go through a bear market, because your trading style and judging from your present stock selection just on the threads you post will cause you to loose a mighty amount of capital in such a market. You might disagree with me here, but IMO if you trade tightly held, micro caps, you will have fun in a boom and think you are an artist and then the bear market will come and you will have no liquidity to close your positions out, etc. etc. I agree with Kennas here - no plan, no profit over a full economic cycle. However, I do wish you the best with your trading system and if you can make money using your "thought", then you are one of the very few in the world.

Cheers

 

[It's Snake Pliskin]

2% of total?
Please read those books again.

 

[coyotte]

I fail to see the reason WHY anyone would not apply tight STOPS.

It's not like selling a property --- with SPs you simply buy back in.

There is always a willing seller.

Get over the ownership mentality.

Cheers

 

[tech/a]

Reece55
is spot on here.

The arbitary placement of a stop of 2% of capital is one which has been bandied arround for years. Its origin seems to be vague,but basically it is thought to be difficult to trade yourself to ruin risking 2% of capital on anyone trade--. Fixed fractional position sizing solves the problem for most but those with small capital bases struggle as position sizing in most trades becomes un workable---hence the attraction to small caps.

As you accumulate larger capital bases and build trading portfolios the number of positions and the Stop placement will directly govern % risk.
Often it will be less---most of mine in my portfolio trading are closer to 1% than 2%

Here number of positions open in a portfolio plays an ever increasing role and Portfolio heat will creep in as something to be aware of (total capital at risk on all open trades).

Position sizing has a great bearing on Capital at risk.
If I have an equal position size over a maximum of 10 trades then Portfolio heat is 10 x my risk on all trades. So in my case Im risking around 10-15% on open trade capital.

Placement and amount risked can vary from trade to trade--- and still have a sensible portfolio risk.

Where ever you place a stop and by whatever means---that stop will be a % away from your buy price.
The closer it is to the buy price the more often youlll be stopped out.
The further away it is from the buy price the higher the price must go to have a tradable R/R --- taking Reeces 1:3.

If its 10% away from his initial buy price he will have to have a 30% gain minimum and a 100% win rate to achieve that R/R on average over many trades.

So As you can see having a TARGETED R/R and a methodology that returns a consistent R/R means a combination of Wins and gains-- well in excess of that target.

Reece a long string of losses would mean that your R/R would decrease from longterm stats---as a long string of wins would increase your achieved R/R for your method of trading. How have you determined your 1:3.
In otherwords how do you know its enough?

It appears that this is a figure you have set rather than a figure derived from testing which shows an R/R based on X trades over X periods.

Point I'm making is that R/R arent things you can aribiterily set,they are a perfomance figure derived from multiple trading figures. To simply set an R/R value to trade by wont/cant guarentee success. They are a consequence of trading---they come after the horse not before it.

 

[coyotte]

Think you will find the 2% Rule comes from Roulet.

It was picked up by Don Scott during the late 60/70s and applied to Thoroughbreed Racing

Basically -- Based on a fixed Bank -- never falling -- increase only after a predetermined rise in Bank.


1% for a Strike Rate <= 25% with a 10% POT
2% for a Strike Rate of 33% with a 10% POT
3% for a Strike Rate >= 50% with a 10% POT


Some great stuff was written in Ozz during the 70/80s on Money Management and Punting, a lot of it applicable to Trading.


Cheers

 

[coyotte]

ATR with Count Back can be a effective STOP as it accounts a Stocks current volatility


Cheers

 

[reece55]

Reece a long string of losses would mean that your R/R would decrease from longterm stats---as a long string of wins would increase your achieved R/R for your method of trading. How have you determined your 1:3.
In otherwords how do you know its enough?

It appears that this is a figure you have set rather than a figure derived from testing which shows an R/R based on X trades over X periods.

Point I'm making is that R/R aren't things you can arbitrarily set,they are a perfomance figure derived from multiple trading figures. To simply set an R/R value to trade by wont/cant guarantee success. They are a consequence of trading---they come after the horse not before it.

Tech
You are right on the money here - arbitrarily setting a risk/reward won't guarantee success here, it must be in reference to your performance. That obviously is all about actually being good at technical analysis and identifying your opportunities carefully. I have a diary I use to document my trades, as well as deep analysis on performance. At the present stage, without disclosing actual figures, I have found it to be successful for my investment objectives. I have only been doing this for a short period after trying other methods that were less successful - my personal view is there is no use in disclosing the actual figures until I have about 5 years of trading history - i.e. I will get back to you in 3.5 years and tell you if i think my system woks, but i want it to be objective.

Cheers

 

[reece55]

By the way guys, here is a good link to the 2% rule:

2% Rule .

Cheers

 

[Bobby]

[




Point I'm making is that R/R arent things you can aribiterily set,they are a perfomance figure derived from multiple trading figures. To simply set an R/R value to trade by wont/cant guarentee success. They are a consequence of trading---they come after the horse not before it.

I wish some of the books I read years ago said the above as clearly !

 

[mrWoodo]

Thanks everyone - All very insightful.

As as aside, am going for two weeks camping in Tas as well, strictly no internet - Without stops, I don't think I'd be able to sleep !