Stops - Why So Important?

[Bobby]

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 .

 

[It's Snake Pliskin]

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:

 

[Bobby]

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:

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.

 

[MichaelD]

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.

 

[MichaelD]

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.

 

[MichaelD]

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.

 

[MichaelD]

Example 3: BCL

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

 

[spitrader1]

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!!

 

[happytrader]

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

 

[forexdiscussion]

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?

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!!!