Stop Loss - where to set it?

[Wysiwyg]

The question being "Where to set it"

(1) Initial Stop.
If long term then I'm likely to add to positions which have a much higher timeframe.So will give far more room. Ive found the optimum (from testing)---regradless of method of stop placement is 8-12% of initial buy price. This gives a balance of being far enough away from most noise (SUN yesterday)--but not that far away that you find yourself lot in between initial buy and stop for prolonged periods---hence opportunity cost.

Very very interesting because I am using an initial stop loss below the previous 20 days lowest low (pivot point). The question I have is ------ is there an optimum n days (other than 20) for a long term trend riding strategy? Or alternatively does anyone use an initial stop loss below the lowest low on another duration (besides 20 days) that works better.

Then, how much lower? 1 *ATR or less?

 

[squeegee]

Hi guys, FANTASTIC forum.....

I havent really done much trading, though love reading about stratergies etc...and one day I will start!!!!!. Id say I am more of investor at present (alot driven by fear to sell as the only time I looked to trade was a flop..IMO.....I bought WOR at about $11 and paper traded it for months and sold out at $17 and waited for a retrace that never came, and watched it go all the way to $28). I have been invested since Nov 2008 (nice timing), and generally hevent touched my portfolio too much, but I do add to it often, and reevaluate positions often. Obviously my portfolio has done as well as most as timing was pretty good, and generally I am in ASX50/100 stocks with a mixture of high/solid dividends with upside potential based on EPS and DPS of 70% or more payouts, and the divs of my portfolio are around 10% (+franking) based on buy in price. I dont use stop losses at present (thought I have been told I should....but see above why I dont............ I do alot...and I mean alot of study on companies I buy into on past performance, and volatility of divs, down to shareholder holdings etc.

anyway.......

I have a couple of question.

1. In a bear market, like that we have just been thru, if one applied stop losses, and got closed out of all trades as all stocks basically tanked at say just after the ASX peak (Nov, 2007?), how would you have seen rentry points between Nov 2007, and say Nov 2008 (first major bottom, where I got in) or March 2009 (bottom)........in a market that is cycling down. Did most of you experienced traders stay on the sidelines, or continually bump against a downtrending market?

2. Do you guys mostly hang around the same stocks? Ie sell XYZ when it mets a top range, or trailing loss, and then wait for a retrace to enter, or if a stock bolts, do you just let it go, and look for a new stock to trade?

many thanks

 

[rbbrain]

Okay, time for my 2-bobs worth about "Stop Loss - where to set it?"

(Noting that much of this is already said somewhere above, but in different words.)

Firstly - get your Trading Plan and Strategy sorted out, and written down on paper, and follow it. Having no trading plan is inviting disaster. If you have a plan that is proven "successful" in hindsight, then you can trade it with confidence going forward. But note that different market conditions (eg. bear versus bull market) can produce results different. And the price charts of different companies can have different "personalities". What works with one stock might not work exactly the same with another.

Second - Work out your risk and money management vallues. Many people agree to "risk no more than 2% of available capital on any one trade". This will keep you in the game longer. You will be able to financially withstand many more than ten losses in a row (even though this is psychologically difficult to cope with).

Third - when setting a stop loss position, it must be determined using some sensible chart-based concept. Such as a prior low, or clear support level. It is no good putting it half way down towards a support level.

What we really want to achieve is a higher probability of success. We need to be clever about these things and minimise the risks.

In a recent simple presentation I did to the BullCharts User Group in Melbourne I outlined 7 different ways to determine a Stop Loss level. And they are all correct. The simple presentation is available for public download from my ShMarket Toolbox web site (Presentations section).

What about spikes that take out your stop? It is important to be emotionally stable here, and accept the situation, and move on. It will happen. We can only be right about 30% to 70% of the time. Provided we minimise our losses and let our profits run, then we should be in front. This is how most good traders stay in the game for the long term.

To quickly address the question of when to get back in? - It depends on what your trading strategy says. If you have a strategy which describes your entry criteria, and the criteria are fulfilled, then enter.

Cheers

 

[gamefisherman]

Just be reading the recent posts........some awesome stuff here, many thanx to all those who have contributed.......

 

[wbosher]

Third - when setting a stop loss position, it must be determined using some sensible chart-based concept. Such as a prior low, or clear support level. It is no good putting it half way down towards a support level.

Cheers

Couldn't agree more, I stick to this concept religiously. I also learnt the hard way . What methods do you guys use for a trailing stop? I generally use the count back method (I think that's what it's called), once I get three upward bars I just keep moving it up each time the price goes up. I've been stopped out a few times, only to watch in horror as the upward trend continues, but not too often.

Also, do most of you sell at a close below the stop, or if the intraday price falls below your stop? I prefer a close below but I'm interested in other peoples methods.

 

[motorway]

Where is his re entry into the same stock or a different one ?

In Getting out the point is so you can get in..

I regard a stop loss as OFFENSE
it gets you out to get you in

You retreat before large forces of SUPPLY
only for one reason
TO ATTACK

OFFENSE IS OFFENSE
DEFENSE IS OFFENSE

Getting out of what could be good MAKES NO SENSE
unless you get into something BETTER

RETREAT is ATTACK
( IF OPPRTUNITY PRESENTS )


A test where in getting out you don't get back into something
IS no test..

because It Stops opportunity LOSS ( Yes as I said it stops loss too )

Please enter favourite military analogy "------------"

Many examples of retreat leading to victory (Or could have )
Must be many where NO retreat proved disastrous

Stalingrad anyone ?


Much to learn from Confederate Civil War General


Joseph Eggleston Johnston



Johnston would only engage against the superior forces of Sherman on His own terms He wanted to either ambush him or make him overextend his lines

He continued to use a stop loss waiting for the right opportunity to enter the fray...
He continually set ambushes and when they were avoided withdrew
If he never got the chance to attack he would have kept all his powder dry.
Because if his Army was destroyed there was no second chance
But with it intact... There was always a chance...

John B Hood stood and fought in series of charges
after which there was no more any army to Speak of, and Sherman marched to the sea...


Johnston was blamed for not attacking.. For continual defensive movements.
But that was wrong (imho ) He knew that the best offense was from defense
esp when the market can steam roll over the top of you like Sherman...

But The whole point of getting out was to GET IN
Not just to GET OUT

It is part of the ENTRY TECHNIQUE
you get out to get IN

You move left to move right
up to go down etc

motorway

Study leaves out the importance of the stop loss
needing also to be seen in terms of opportunity cost

As allowing / as part of the getting in..

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1214737


I see flaw in this study


Motorway

 

[pavilion103]

Hey guys, I'm after some opinions.

I am looking to trade with fixed fractional position sizing.

So for example, I have a $20,000 account and want to risk 1% per trade ($200).

If I buy at 50c and there is good technical stop level at 45c. Then my position size is $200/$0.05 = $4,000.

So anytime my initial stop is triggers I will lose $200.

So from the above it appears that whatever percentage I put the stop from the entry price I will only lose $200 maximum if my initial stop is hit.


I was reading this in an article however and it confused me:
"For example, widening your initial stop will increase your percentage of winning trades by giving price more room to move into profit without being stopped out, but this will come at the expense of a larger average loss on those occasions you do get stopped out"

How can this produce average larger losses? Wouldn't all losses me $200 max if the intial stop is hit? Isn't the risk that there is MORE chance of a tigher stop being activated, not a larger loss on a wide stop?


Is there something really big and obvious that I am missing here?
Thanks,
Matt

 

[tech/a]

Its a very general comment--
Anyway they obviously are taking the same number of shares with a wider stop value.
They are not
(1) fixing their risk by taking a fractional position sizing
Or
(2) using a fixed Risk amount.

By the way it doesn't necessarily guarantee a greater win rate.
If its too wide it can cause you opportunity cost as the trade wallows between entry price and stop price.

The sweet spot seems to be no more than 12% from the buy price and no less than 6% from the buy price. IE $1.00 buy 88c or at worst 94c as a rule of thumb---the stop can be technical and if it falls in that range then its pretty good from my testing.

 

[pavilion103]

Its a very general comment--
Anyway they obviously are taking the same number of shares with a wider stop value.
They are not
(1) fixing their risk by taking a fractional position sizing
Or
(2) using a fixed Risk amount.

By the way it doesn't necessarily guarantee a greater win rate.
If its too wide it can cause you opportunity cost as the trade wallows between entry price and stop price.

The sweet spot seems to be no more than 12% from the buy price and no less than 6% from the buy price. IE $1.00 buy 88c or at worst 94c as a rule of thumb---the stop can be technical and if it falls in that range then its pretty good from my testing.

So if someone uses a wider/tighter stop with the same number of shares, does this mean that they would be risking different sizes of their portfolio per trade. E.g. instead of say 2% then maybe 1% or 3%?
What are your thoughts on this? Do you think fixed fractional is one of the more or least effective ways to place stops? (I am finding that I'm struggling to generate large multiple of R gains e.g. most seem to range between 0.5R and 1R, which is very frustrating). I'm not sure if I'm missing the piece of some sort of puzzle here.

 

[pavilion103]

So with that general guide (from your experience) of 6-12%. Does that mean you would not take one like this (irrespective of whether it is a good entry or not. I'm more concerned about the gap from entry to initial stop in this example).

Here it looks ok from a techincal point of view (support line). But the stop is only 2.5% from entry. Even that looks widish on this chart. (entry is on the first bar to break support)

Some of the companies I've entered like this one don't move by a huge percentage on average. Are these poor companies to trade?

 

[tech/a]

So if someone uses a wider/tighter stop with the same number of shares, does this mean that they would be risking different sizes of their portfolio per trade. E.g. instead of say 2% then maybe 1% or 3%?
What are your thoughts on this? Do you think fixed fractional is one of the more or least effective ways to place stops? (I am finding that I'm struggling to generate large multiple of R gains e.g. most seem to range between 0.5R and 1R, which is very frustrating). I'm not sure if I'm missing the piece of some sort of puzzle here.

If your only getting .5R on a trade
Either the entry isnt with enough momentum
The stop is too wide
Or your not letting the trade run long enough.
It appears you've not tested your trading method.
As such you are struggling with whats----right!

You should really not trade until you understand the consequences of the various scinarios you put up for answering.
Testing will educate you faster than anything I know of.

 

[tech/a]

So with that general guide (from your experience) of 6-12%. Does that mean you would not take one like this (irrespective of whether it is a good entry or not. I'm more concerned about the gap from entry to initial stop in this example).

Here it looks ok from a techincal point of view (support line). But the stop is only 2.5% from entry. Even that looks widish on this chart. (entry is on the first bar to break support)

Some of the companies I've entered like this one don't move by a huge percentage on average. Are these poor companies to trade?

View attachment 42844

I would not be trading this your bottom picking.

Very low reward to risk.
Trade with momentum.

 

[pixel]

Just by sheer coincidence, I've stumbled across this somewhat controversial article:
http://www.incrediblecharts.com/sitemap.php?mgroup=162

The writer claims that setting a Stop Loss can significantly reduce a portfolio's profitability. Maybe he has a point - in the confines of his study's scope: $1M account, 2% position size, and entry/exit rule based on crossing the 60-day EMA.

But read and think for yourselves...

 

[skyQuake]

As traders, we shouldn't really focus on the return of each individual trade; rather we should focus on the overall return of our portfolio.

I stopped reading right there.

Yup let ur dogs run cause the portfolio is doing ok...
Thats just turning a blind eye!

 

[pavilion103]

I would not be trading this your bottom picking.

Very low reward to risk.
Trade with momentum.

I am short on this one in the practice sim. I entered on break of support (maybe could have waited for confirmation with this one).

How is it low reward to risk? Can you please explain what constitutes a high reward/risk trade? And how I might identify them.

 

[Wysiwyg]

Previously posted on ASF, this research piece on stop techniques and the implications of getting forecasts wrong. "The sequential nature of stop techniques" in Chapter 3 figure 6 shows an ideal implementation of buy stops, initial stop loss, protective profit stop and trailing stop.

 

[tech/a]

I am short on this one in the practice sim. I entered on break of support (maybe could have waited for confirmation with this one).

How is it low reward to risk? Can you please explain what constitutes a high reward/risk trade? And how I might identify them.

Sorry I thought you were long.
Disregard

 

[pavilion103]

I was hoping for some opinions on this trade. I entered on the day after the highlighted bar (the first wide one) and you can see my initial stop at $0.39.

So far the profit on this trade is 1.5R. Stop loss is 7.1% from entry price. Is the stop on this on ok? I put it here so that if it goes back below the line I am out.

I am also trying to experiment with ways to enter some trades (if they look like good opportunities) with a tighter stop and higher R:R ratio. If I had entered the day before on the highlighted bar. My stop would have been around 3.7% from entry price. I would have made a nice little profit of 4R and could exit the position at the first sign of weakness. I certainly wouldn't enter most trades like this but if the opportunity arises is this wise?

What are people's thoughts?

 

[Boggo]

I was hoping for some opinions on this trade. I entered on the day after the highlighted bar (the first wide one) and you can see my initial stop at $0.39.

So far the profit on this trade is 1.5R. Stop loss is 7.1% from entry price. Is the stop on this on ok? I put it here so that if it goes back below the line I am out.

I use a similiar approach except that there is no really standard application of stops that fit all especially in the current market.
You've got the concept, its just what you are prepared to risk/lose that now determines the $ value of the stop bearing in mind that you don't want to really tight stops to accommodate account size or buy volume.
Look at the stop from a practical chart point of view and then see if it is going to be a trade that you can consider rather than deciding that you want to trade it and then trying to make a stop fit, you will cop a thousand small lashes that way.

My initial "look" at the chart of any candidate involves glancing at the low of the bar prior to the current bar (provided that its low is lower, if not then the bar before that) and then making a quick mental calc of whether its distance would be too expensive if it turns against me.
I seldom continue further with anything that involves double digit percentage stops.

Two examples that came up last night where I would apply this approach successfully are CPL and IMD.
Have a look at both of those and tell me what are your views or approach.

The main thing is that you have a known or planned loss figure that you are prepared to lose and in some cases you may be able to apply a target based on a previous and current pattern.
This is the case on two of my current holdings (ALK and ILU) where I know the stop and can reasonably predict a target.

Once they start moving in the right direction the next bit is when do you move the stop to the breakeven point ?

 

[pavilion103]

I use a similiar approach except that there is no really standard application of stops that fit all especially in the current market.
You've got the concept, its just what you are prepared to risk/lose that now determines the $ value of the stop bearing in mind that you don't want to really tight stops to accommodate account size or buy volume.
Look at the stop from a practical chart point of view and then see if it is going to be a trade that you can consider rather than deciding that you want to trade it and then trying to make a stop fit, you will cop a thousand small lashes that way.

My initial "look" at the chart of any candidate involves glancing at the low of the bar prior to the current bar (provided that its low is lower, if not then the bar before that) and then making a quick mental calc of whether its distance would be too expensive if it turns against me.
I seldom continue further with anything that involves double digit percentage stops.

Two examples that came up last night where I would apply this approach successfully are CPL and IMD.
Have a look at both of those and tell me what are your views or approach.

The main thing is that you have a known or planned loss figure that you are prepared to lose and in some cases you may be able to apply a target based on a previous and current pattern.
This is the case on two of my current holdings (ALK and ILU) where I know the stop and can reasonably predict a target.

Once they start moving in the right direction the next bit is when do you move the stop to the breakeven point ?

Thank you for the insightful post.

Taking the IMD example. If I was to trade this one I would do the following in the chart below. This is my dilema: I could put the stop loss at the swing low (8.5%) or under the low of the previous bar (6.28%). In this case I think I would favour the stop loss at the swing low (8.5%), which looks better from a technical point of view.
If price shot up the next day (hypothetical green bar) I would look to trail the stop immediately to at least the low of the previous bar (in orange). This would ensure that my maximum loss is only 0.6R (even if price traded above the blue without increasing significantly I would still move the stop from the 8.5% because any fall below the blue line would spell trouble)
If/when price closes above the green bar I would place the stop at around $2.20 just under the line, bringing it close to break even.
What do you think of this example?
My number 1 goal is to reduce the amount of risk in play asap.
My number 2 goal is to get the trade to break even asap.

With CPL I am a little less sure because I haven't been trading many that break from a channel like this. I wouldn't take the trade with stop 1. Much too far away. Stop 2 looks better than stop 3 from a technical point of view but still a long way from price. If I was to trade with stop 2, I would want to trail to stop 3 in the next day or two.
I am not overly confident thought because as I said I haven't traded many of these.

(Charts below)

Can I please get your feedback on both of my analysis?