Stop losses

[CanOz]

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

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

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

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


CanOz

 

[AlterEgo]

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

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

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

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

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

 

[AlterEgo]

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

 

[Stormin_Norman]

yes. that's something i look at too.

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

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

 

[johenmo]

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

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

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

 

[tech/a]

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

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

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

 

[lesm]

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

 

[Wysiwyg]

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

 

[pilbara]

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

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

 

[MS+Tradesim]

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

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

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

 

[johenmo]

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

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

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

 

[Johno]

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

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