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SL methods for Intermediate Term trading

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Hello,

 

I'm looking tips on good stop loss / profit taking methods for Intermediate Term trading (1-9 month market trends).

 

I looking for something thats not too tight stoping me out of the trade too early or too loose giving back too much gains.

 

I trade the S&P 500 index.

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Hi,

 

What you are asking is a little too vague in my opinion and not sure if anyone can provide you any tips or advice regarding it. It sort of like asking someone what stock to buy, at what level, and where to exit.

 

It is best you start by explaining your strategy, methodology, etc... and then receive some feedback to improve on it.

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Ok, I will describe my strategy more closer.

 

- The strategy trades multi-month trends.

 

- Only executes trades in the main direction of the long term trend (LT)

If the LT trend filter is in Bull/Long mode (cyclical bull market) we only take the

BUY signals, and the opposite if the LT filter is in Bear/Short mode.

 

Chart illustrating the Intermediate Term swings of the S&P 500 that the strategy trades:

 

http://img508.imageshack.us/img508/5597/itswingsspxmq2.jpg

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Hi,

 

What you are asking is a little too vague in my opinion and not sure if anyone can provide you any tips or advice regarding it. It sort of like asking someone what stock to buy, at what level, and where to exit.

 

It is best you start by explaining your strategy, methodology, etc... and then receive some feedback to improve on it.

 

Ok, I will describe my strategy deeper.

 

- The strategy trades Intermediate Term swings (multi-month trends).

 

- Only executes trades in the main direction of the long term trend (LT)

If the LT trend filter is in Bull/Long mode (cyclical bull market) we only take the

BUY signals, and the opposite if the LT filter is in Bear/Short mode.

 

Here is a chart illustrating the Intermediate Term swings of the S&P 500 that the strategy seek to exploit:

 

http://img508.imageshack.us/img508/5597/itswingsspxmq2.jpg

 

(will add more info later)

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Hello,

 

I'm looking tips on good stop loss / profit taking methods for Intermediate Term trading (1-9 month market trends).

 

I looking for something thats not too tight stoping me out of the trade too early or too loose giving back too much gains.

 

I trade the S&P 500 index.

 

Setting stop losses and profit targets are arguably the most diffcult aspects of trading. Here are some ideas that I use in my trading (in no particular order)...

 

Setting Stop Losses

  • If you want to use the same stop loss for every trade, you can use an Average True Range (ATR) function in the timeframe you are trading. For example, if you trade off of a 5 minute chart, you can calculate 2.5 times of a 10 period ATR and use that as your initial stop loss. You can choose a multiplier of 2 to 3. Once you're in a trade you should manage your stops, but don't be too aggressive in moving your stop too close or to breakeven too quickly or you will be stopped out most of the time trading the ES just to then see it move in your favor. Give your trade space to move. Most traders seldom catch the high/low tick of a swing before the market starts moving in their favor. Personally, I use a 3 point stop most of the time (see bullet below of more details).
     
  • Another approach I use is to review all of my recent trades for the year and determine what the optimal stop for my trading should be. For example, thus far, I have placed 225 trades and my maximum 3 pt stop has been hit 5 times. When my maximum stop has been hit, those were times that my trade decision was just wrong, and the trade never went "in the green" for me. In other words, I am suggesting you consider the Maximum Adverse Excursion (MAE) of your previous trades. This is my rationale for mostly using an initial 3 point stop. Note that I've been stopped out for 3 pts only 5 times because I "work" my stops once I'm in the trade. I use an initial stop because I want to give the trade room to move since I seldom catch the last tick before the trade goes in my direction.
     
  • You can set a protective stop loss based on market structure. That is, place your stop where the market would prove you wrong should it go there. If that requires a stop too far away with respect to your risk parameters, than wait until the market trades closer to that location or "pass" on the trade. Without details of your trading methodology, I can't really say more about this.
     
  • Some traders use a fixed stop based on a percentage of their account balance. Some traders think that they can trade, let's say, 2 ES contracts with a 4 point stop or 4 ES contracts with a 2 point stop because $400 is 2% of their account balance. Bad idea! I would highly discourage anyone from using this method.

 

Setting Profit Targets

 

  • I like to scale out of my trades using 3 units, where a unit is X contracts. Again, I studied my previous trades and evaluated the trade potential of each trade even if I did not capture the bulk of the move. What I am suggesting here is that you evaluate the Maximum Favorable Excursion (MFE) of your previous trades to identify the profit targets of your first two units. For the last unit, I would let the profits run, but I usually set a profit target based on market structure (or tighten my stop as price moves toward my profit target). Letting your profits run on your last unit is critical to long-term success if you plan to scale out. Otherwise, it would be difficult to do better than breakeven over the long-term. Scaling out will definitely raise your win/loss ratio and confidence significantly, but do not overemaphasize this because what really is important to survival is your profit factor. For example, based on research of my trading, I try to scale out my first 2 units at 2 points and let my third unit run based on a profit target that is usually much greater than 3 points (my intial stop). But what if I don't let my third unit run and instead close out my whole position at 2 points, that's $300, not bad. But what if I get stopped out at my maximum stop loss, that's $450, not to mention that I can have multiple, consecutive losing trades stop me out at 3 pts. There are a lot of variations, but I think you get the idea for my rationale of letting the third unit run. The bulk of your profits will usually come from a few really good trades. By the way, I tend to move my initial stop loss up modestly as the position moves in my favor. I move my stop to breakeven + 1 tick when the trade moves 3 to 4 points in my favor.
  • Ultimately, here is where I am trying to go... I want to scale out of my trades based on support/resistance levels in the market. For example, if my S/R level is 5 points away, then that's where I want to start scaling out and hold until we reach the next S/R level. But right now, I feel that scaling out as described above is appropriate for me as a fairly new trader. As my trading and confidence improves, I will continue to refine my profit target method. There is a lot of emotions and mental stuff that makes it difficult to hold on to a full trade for so long, but this is where I strive to be soon. For me, experiencing an adverse move against my position after I have been up many points is difficult for me to handle.

Regarding reviewing your previous trades, combined order execution and charting software platforms, like TradeStation and NinjaTrader, will log all of your trades on the chart so you can review them later. For me, logging trader performance statistics and executed trades in my trading platform is a very important feature. I spend a lot of time in this area because the insight I gain from it usually affects my bottom line. Anyway, I hope this helps.

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"For example, if you trade off of a 5 minute chart, you can calculate 2.5 times of a 10 period ATR and use that as your initial stop loss. "

 

ant, clarification -- curious if you personally use the 'close' of the bar or the 'high' of the bar for the calculation -- assuming you are long and would like to automate this stop?

 

I use a very similar method where the EasyLanguage code (for a stop to be used with a long is):

 

value1=highest(c,3)-(3.0*avgtruerange(10));

 

-- I use highest close just because of the occassional intrabar spikes -- and I would stop out on a violation of the highest stop price.... rarely does this get hit if pattern is legitimate.

 

I have experimented with entering on a 1.0 to 1.5 ATR pullback after a momentum-high-pullback type of set-up so the distance to your initial stop (3.0 ATRs)... is around 1.5 to 2.0 ATR's (entry pullback #ATRs minus stop # of ATRs)... this has worked pretty well -- though the market doesn't let you in on days of spikey non-stop/no-pullback moves.

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"For example, if you trade off of a 5 minute chart, you can calculate 2.5 times of a 10 period ATR and use that as your initial stop loss. "

 

ant, clarification -- curious if you personally use the 'close' of the bar or the 'high' of the bar for the calculation -- assuming you are long and would like to automate this stop?

 

I use a very similar method where the EasyLanguage code (for a stop to be used with a long is):

 

value1=highest(c,3)-(3.0*avgtruerange(10));

 

-- I use highest close just because of the occassional intrabar spikes -- and I would stop out on a violation of the highest stop price.... rarely does this get hit if pattern is legitimate.

 

I have experimented with entering on a 1.0 to 1.5 ATR pullback after a momentum-high-pullback type of set-up so the distance to your initial stop (3.0 ATRs)... is around 1.5 to 2.0 ATR's (entry pullback #ATRs minus stop # of ATRs)... this has worked pretty well -- though the market doesn't let you in on days of spikey non-stop/no-pullback moves.

 

Dogpile, I agree with you. For a long trade, I would use the high, not the close for automated stops. Thanks for the stop info on the "Momentum High-Pullback" setup. I'm always hesitant to put a stop in that is less than 2 ATR, but I think the smaller stop could work well with that setup. By the way, that setup is probably the highest probability trade I've tested on multiple markets when playing for a small win.

 

Q. When entering a trade, do you enter when the high/low of the previous bar is taken out or do you try to enter on the bid/ask (i.e., before price turns)? I always enter before price turns because I think a trader gives up too much when they wait for the high/low of the previous bar to be taken out.

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re entries and exits.

 

I use limit orders on pullbacks for that atr-pullback set-up (for ES). Very recently I have not been getting filled and have a back-up plan that gets me into YM on a swing trading rule using parabolics. For instance, on Friday -- I had a limit order to buy ES but it missed trading there by a tick. The market did pullback by about 1 ATR but not far enough to fill my limit order.. But I have seen that movie before and I liked the pattern so I entered a 'buy-stop' on YM based on a 2-min parabolic break-up (parabolic input parameters were re-set to 0.15/0.15 fwiw). This way I get a position on for the pattern I see if ES doesn't let me in. This is a 'feel' game at this point as I may scratch the YM for a trivial loss if it doesn't carry. I like using buy and sell stops on YM and don't feel it is giving up too much because of the tick value is low relative to the tick range (a few ticks on YM isn't so crucial when its $5 per tick and trades 150+ ticks in range per day -- whereas a few ticks on ES can be crucial at $12.50 per pop trading maybe 80-100 ticks (20-25 pts) on a good day)...

 

ES is definitely cleaner with YM acting more like RUS lately --- but YM using buy/sell stops is kind of cool as you can often catch a buy/sell program and join in early and instantly go 'in the money' by 15-20 ticks which gives you room to evaluate the action. If your buy stop triggers and ES reverses before YM -- you can exit YM and look to 'market order' back in -- often at a better price than your last exit -- if you like the action in ES...

 

yes, you can out-think yourself on this stuff so I only do this kind of thin in situations where the market seems to be acting real spikey -- like it was late last week -- not letting you in on your usual set-ups. spikey is good for buy/sell stops and not good for pullbacks.

 

I spend most of my time watching ES -- but I trade YM more than ES at the end of the day.

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Dogpile, I like your flexibility when entering a trade based on your trade conviction and not wanting the trade to get away from you. I think it's important not to be so rigid with rules. However, you don't want to start chasing a market, it could be a slippery slope.

 

With respect to the tick size of YM vs ES, I don't think it would make a difference to me. If I were to trade the YM, I would probably trade twice the number of contracts I trade on the ES, so giving up the spread would probably mean the same to me regardless of which contract I trade. But I never gave this that much thought.

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