Hard Stop Placement – The Great Contradiction?

[BearBullTrading 10]

First - thanks to everyone who took the time to help me.

I do hear what you are all saying - and grasp most of it – set your stop when your trade entry / logic is invalidated, stops are set as a result of testing, probabilities, the risk level one is willing to absorb, etc.

 

But you may think I do not get it - after you read this.

 

1. While it may not be realistic, as a relative newcomer, I am seeking some black and white rules that take the anxiety out of my trading.

 

2. I may be able to answer my own question (through your wisdom provided thus far) that if i cannot stomach or my account cannot tolerate too much risk, than i simply set my stops tighter knowing that I will be stopped out more often miss out on bigger run-ups and yet avoid larger losses. Maybe this is all that simple.

 

3. But if it is that simple, why are there supposedly credible professional trading tutors out there who prescribe two opposite but absolute stop placement rules?

 

a. - "Exit as soon as the trade goes against you and if the trade does not go in your favor within the first few seconds of the trade on the M5". and the opposite...

 

b. Place your stop at the bottom line of the channel or approx 2 x ATR - which results in a far greater draw-down per trade and far greater risk.

 

Here's my lack of understanding - and I'll give you what I hope is a simple picture using just a sample setup. Please see the attachment.

 

 

- In using a simple price action channel, one would enter at the arrow, when price just passes the upper channel line.

- Using some of the logic I read, a stop theoretically should be placed just below that line as this is where the trade logic has gone wrong.

- After all, if price goes below where I entered, and i would not have entered there in the first place, then that's where my stop goes.

- And if get stopped out there as I would have in my diagram, I missed out on the big run up later.

 

So the "but" is that price may drop and fluctuate a bit - needing "room to develop" in side that channel before it finally picks up and goes profitable. And if in fact I set my stop much farther out, at the bottom of the second channel line, I stand to get stopped out with a much greater loss - at a point only 6 candles further into the trade (the Hammer just before the next red candle).

 

So - at the sake of being redundant - sorry - why not do as some professional trading tutors firmly advise and exit if the trade does not go in my favor within the first few seconds of the trade (on the M5) - trading off a larger loss with more frequent smaller losses? Some professional tutors also say to place a stop at the bottom of the second candle back.

 

To which you can say - you have to back test this to determine if that makes sense.

Is this the real only answer?

 

I apologize if I am just wasting everyone’s time. Maybe I need a vacation. I may be missing the point and not getting anything. I hope you can follow what i am saying. Thank you very much, again, for your time and help.

 

If I just note some points on your chart as to what has happened...

 

- The market makes a low (1st green candle) (Point A)

- Market moves up and makes a high (Point B)

- Retraces about 50/55%(eyeballing it) and makes a higher low (low of Green candle) (Point C)

- Market moves higher, above point B (D), - you enter

 

A common method of determining wether price will continue in a direction is looking at the swing high/low sequence...If its making HH..HL..HH...HL etc, someones assumption may be that it will continue to do so, until the sequence is invalidated.

 

If using this "structure" point of view, the sequence of Low (A)..High (B)..Higher Low ©...Higher High (D) would be broken and invalidated below point C, therefore the stop would be just below Point C, as that is were this "trade logic" has gone wrong ,

(If your logic is based on price touching channel lines for entry/exits I cant comment as I don't subscribe to the same "trade logic" re channels to base a trade decision on).

 

Only you can decide if this size stop is to rich, depending on where you anticipate the market going, how often/likely you expect it to happen etc.

 

Having a larger stop does not necessarily mean "greater drawdowns" or increased "risk"

 

With the caveat that this is hindsight analysis (of which everyone is an expert) and without much market background ..Once in the trade at your entry point, after the trade developed a stop could have been moved up below the green candle (2 candles after entry) or below the green "hammer" (5 candles after entry)..(A break above the hammer could have been an adding point) ...

 

Whilst this hindsight analysis shows the above, or even just leaving a stop at the initial point C would have "worked".. they are just ideas to think about as the market develops and next time, when trading on the right edge, this approach could just as easily "fail"

 

Trade Well..

Edited February 10, 2012 by BearBullTrading

[BlueHorseshoe 10]

 

Trading without a stop with any system invites or invokes your worst nightmare.

 

Trading without a stop is like playing no fold'em hold'em.

 

 

If your worst nightmare is cleaning out an account, then trading a poor strategy is also a sure way to invite this. A strategy that loses money because its performance is damaged by stop losses is a good way to invite your worst nightmare.

 

Consider these two scenarios:

 

- You know that your worst case scenario (your stop loss getting hit) is limited to, say, a two percent loss on your account.

 

- I know that my worst case scenario (a once in a century single day decline that wipes out my account) is limited to, say, a two percent loss of my net worth.

 

I can afford a two percent loss of my net worth. I am happy to gamble my entire account on the future performance of my strategy and the unlikelihood of a market crash because the account represents risk capital - money that I can afford to lose. The reason I am prepared to do this is because I know that the chances of losing all my account capital are extremely small - much smaller, in fact, than the chances of wiping out my account capital through successive stop-outs on otherwise profitable trades.

 

Trading without a stop is not stupid - trading with money you can't afford to lose is stupid.

[MightyMouse 12]

If your worst nightmare is cleaning out an account, then trading a poor strategy is also a sure way to invite this. A strategy that loses money because its performance is damaged by stop losses is a good way to invite your worst nightmare.

 

Consider these two scenarios:

 

- You know that your worst case scenario (your stop loss getting hit) is limited to, say, a two percent loss on your account.

 

- I know that my worst case scenario (a once in a century single day decline that wipes out my account) is limited to, say, a two percent loss of my net worth.

 

I can afford a two percent loss of my net worth. I am happy to gamble my entire account on the future performance of my strategy and the unlikelihood of a market crash because the account represents risk capital - money that I can afford to lose. The reason I am prepared to do this is because I know that the chances of losing all my account capital are extremely small - much smaller, in fact, than the chances of wiping out my account capital through successive stop-outs on otherwise profitable trades.

 

Trading without a stop is not stupid - trading with money you can't afford to lose is stupid.

Trading a poor strategy is a sure way to destroy your account whether you use stops or not.

Sometimes, stops will ruin a trade. Sometimes they will help a trade. To me a stop merely means that the limit that I wanted to risk on a particular entry has been reached. Also, to me it is a good sign that the timing of the entry is off. My timing is off all the time and I, therefore, get stopped out all the time. I have no reason to bull shit anyone

 

The reason that I am willing to limit the risk on a trade is because I know that I do not know what the chance of losing on a trade really is until after the fact. It is somewhat foolhardy to believe that you can know what the market is going to do or not going to do. After the fact it all makes sense, before the fact I plan for the worst; but, not to suggest that everyone should do what I do.

 

I give the market as little as I can. However, I am glad that there are others who are willing to give the market a lot more than I do when they are wrong.

[Peterthemonkey 10]

 

To which you can say - you have to back test this to determine if that makes sense.

Is this the real only answer?

 

 

How would you go about "optimizing" anything?

 

As others have mentioned "experts' advice is full of platitudes, generalization, comments devoid of proper context, and worse. It is a mistake to view these "pronouncements" as being rules applicable without exceptions. There are too many diverse trading systems and methods.

 

There is no fundamental contradiction here, only miscommunication and misunderstandings.

 

If I may approach this in very simple but perhaps useful terms:

 

When we enter a trade we place capital at risk of loss in exchange for the potential to profit. How much risk are we willing to accept to put on a trade? Trade management, which is designed to address the development of various scenarios, once we enter a trade, is designed to reduce the initial risk while maximizing profits. It is a balance where varying one affects the other.

 

Disregard the concept of a hard stop, moving stop, multiple stops...........

Stop trade, means exit trade. As we enter a trade we also need a predetermined exit point for maximum acceptable losses. As time and prices move forth our exit point may also change in consideration of current developments, which may now be significantly different then at entry point.

 

As to where these exit points are best set at, is a question that only the development of your trading system can answer. Don't trade someone else system or method without first making it your own.

 

So depending on your system the "hard stop" may be the one and only used to exit at a loss, with perhaps multiple exit profit targets possible, or vice versa, or other combinations. And the stop may be here or there.

 

Consider the probabilities.

[WWWW 10]

Again, thanks to everyone for their generous donation of their time to my plight.

 

I am or may not be getting it though.

 

One more try - then I will not bother any of you any more....

 

On my misuse of the term hard stop - got it. Let me get beyond that. My fault for not doing a better job of communicating.

 

1. Let's say i just use one stop. That stop will never more than I am willing to lose per trade - and that is 2% of my trading account per trade.

 

2. I also want that stop to keep me in the trade long enough to capture upside moves but keep my losses to an absolute minimum – that is, far LESS than the 2% per trade I am willing to risk.

 

3. I am told that the point at which I place the trade is where the market proves me wrong. But that point could be immediately when the action goes as little as 2 pips in the red – or even 1 pip for that matter. Right? So – do I exit then? At exactly the instant I am no longer in the black? Even 2 seconds into the trade (I trade on the M5)?

 

After all – I entered with the intent of making a profit, the market moved against me in these first 2 seconds, I am now down 2 pips – so why not get out right then and there?

 

4. The answer may be that there will always be noise – that takes my trade into the red over the course of several minutes, but ultimately that noise is shed – and the trade goes in the right direction.

 

5. So I guess the question is – how do I identify the “noise level” so I can put my stop right outside that noise, not ever letting the trade get close to my 2% loss max per trade, etc.?

 

6. Is it 1 ATR on average? Is it 2 ATR? Is it at the bottom of the price channel line?

 

7. I saw a vid of I believe it was Kathy Lien – and she said that after loads of research, they concluded that a stop of 2ATR is always a good rule to follow.

 

Again - as a less experienced trader, I seek comfort in rules that guide my actions and reduce my anxiety. The response from BearBullTrading (among a few others) was getting at what I think I am seeking. me there.

 

Am I making any sense? Am I missing all of your good points? Thanks again.

[Peterthemonkey 10]

Hope the following clears things up a bit.

 

I enter the trade when instrument price is at 100.

I am willing to accept a price drop to 95, to give the trade a chance to perform based on my research.

However, now it is 5 minutes after I initiated the trade. Price stands at 99, based on current conditions and developments since trade entry, I move my stop to 97. This is now the point at which my trade is no longer valid. It is the limit it needs to perform based on current conditions, which have changed since entry. Strictly a figurative example, initial stop at entry could remain valid, it all depends on your research assessment and the trading plan you developed from it.

 

As to the best stop right after entry or subsequently to deal with "noise", 1 ATR, 2 ATR, price channel, or other, this can only be determined by research to guide you as to where and when to exit. What if I use 1 ATR, or 2 ATR or other, over a period of time, number of trades, considering market conditions, etc., which provides the most profit with acceptable risk.

 

There will always be losses, noise that just touches your stop and then reverses fabulously into a great missed profit. Moves where you only breakeven or get a tiny portion of the potential profit, if only............. These are the expenses of doing business, necessary to garner long term cumulative profits. The sooner you get used to it, adapt to accept it, the faster you will be on your way to success.

 

I would suggest you use others research and advice as a source of ideas for your "own" research. (period)

 

Excuse me if I sound too preachy, and don't worry about asking questions, that's what this forum is for: questions, answers and discussion.

[SIUYA 11]

Again - as a less experienced trader, I seek comfort in rules that guide my actions and reduce my anxiety. The response from BearBullTrading (among a few others) was getting at what I think I am seeking. me there.

.

 

Rules may not help your anxiety if you dont have a sound basis for those rules....ie experience, backtesting, a fundamental idea of how you think the market works and how you can profit from that within your personality -----otherwise all you will do is deviate from those rules and continually try and change them.

 

To minimise the anxiety you need to accept that not only will you have losses, (no matter how they are called, or how you get them) and that you will quite often be wrong. If you cant accept that then all the stop placemen for ideal/optimised/backtesting etc; etc; will not make one iota of difference.

 

To try and identify the noise level will still leave you with the same problem - you have to accept that there will always be noise and you then need to work out how to minimise this noise - or at least learn to live with it within the parameters that work for what ever system you adopt.....and then tweak the 1 atr, 2 atr position sizing...... as bullandbear hits on - I think an underlying philosophy of the markets might be more important, and then the stop levels will fit that......

[zdo 20]

WWWW,

 

bump

...and then the stop levels will fit that......

 

ie forget all the "I am told" s, the vids, x atr’s, etc... especially if they are not proven stop strategies for the exact same system you are using (or if ?? they are the supposedly credible professional trading tutor’s compensations to take the “anxiety” out of their own trading instead of what is really best for their system)

ie dig, iterate, and test out the system specific zones (sorry, no Black and White) that work for your own edge(s), and stay within those zones… and just be with the “anxiety” and dis comfort, instead of finding ways to prevent it.

 

(...I’m not in full understanding of your system or the conditions under which you take signals, etc. … also without getting into the 'quality' of your channel... plus, my concepts of 'noise' are too out there for this discussion, but 'noise' is related... so take the following with a grain of salt ) --- anyways, from what I’ve projected :meguessing: about your system, I would suggest you test almost never placing a stop inside the channel - and Stop A is definitely inside the 'channel' …

 

(ultimately it probably won’t,) but hth

Edited February 13, 2012 by zdo

[BlueHorseshoe 10]

 

5. So I guess the question is – how do I identify the “noise level” so I can put my stop right outside that noise, not ever letting the trade get close to my 2% loss max per trade, etc.?

 

'Noise' is typically defined using a measure of volatility, of which the ATR is an example. You could also use Standard Deviation or, if you can program, the 'Volatility' function from which the DMI+/- is derived. There are also countless other more sophisticated possibilities, none of which are certain to perform any better.

 

The way that I would approach this issue is to think 'I want my stop loss to be outside market noise, and my profit target to be inside it'. Such an approach should, in theory, present the possibility of profit without necessarliy having an edge in the entry criteria. Assuming that you had a 'neutral' (or random) entry, at zero, and that market noise caused price to oscillate by +10 and -10, and you were buying, then you'd want a stop at -12 and a profit target at +8, for example.

 

Of course, in reality, this is a huge over-simplification. There may be more upside noise than downside noise. The noise level will change after the position is established. And assuming that your entry provides a significant edge, then your approach to noise may need to be different. A trend-follower, for example, places their stop within noise, and their target outside. They still have positive expectancy.

 

Another thing to consider is that you are only looking at 'noise' within a particular timeframe. If you didn't have a stop in place and allowed price to wander significantly against your position, then this adverse excursion is a perfectly normal amount of noise in a higher timeframe, and you can therefore anticipate a corresponding amount of upside noise within that higher timeframe.

 

I personally trade without stops (to all intents and purposes) - I have a percentage win rate that might make plenty of people on this forum jealous . . . But I don't have a PL statement that would make very many people jealous at all. One thing has a tendency to even out another.

[BlueHorseshoe 10]

Following my previous post I thought I would try and provide something to back up and hopefully clarify what I was describing. The following is code for an EL strategy that buys the ES at 1700 GMT - or the midday 'doldrums', in other words. It's only a demonstration, so the entry time was chosen at random (as was the decision to buy, rather than sell).

 

The important part here is that the stop loss is outside of normal volatility (at 3 standard deviations), and the profit target is within it (at 1.5 standard deviations). I've also added in an instruction to buy only when an RSI shows that the market is oversold - this is not essential. And then a few suggestions for other optional filters (trend and 'headroom') are given in square brackets.

 

You can run your own backtests, but over a ten year period the Profit Factor was 1.44 and the average profit per trade was $32, with total net profit of about $16k (that's without any deductions for slippage or commission).

 

{

 

** Copyright © 2012-2013 BlueHorseShoe. All rights reserved. **

 

INTRADAY VOLATILITY SCALPER - @ES 15MINS - VARIABLE STOP AND TARGET

 

DISCLAIMER: This EasyLanguage strategy has been provided as an educational example to demonstrate a potentially profitable aspect of the relationship between intraday market ‘noise’ and exit orders. It is neither a solicitation nor an offer to buy or sell any type of security or financial derivative. No representation is being made that any account will or is likely to achieve profits or losses similar to those described. The past performance of any trading system or methodology is not necessarily indicative of future results.

 

FUTURES TRADING CARRIES A SIGNIFICANT DEGREE OF RISK.

 

TRADE ONLY WITH CAPITAL THAT YOU CAN AFFORD TO LOSE.

 

}

 

 

inputs: n(3);

 

if t=1700 then begin

if RSI(c,2)<20 {and c>average(c,1000) and h<highest(h,20)-((0.5*n)*(StdDev(c,10)))} then

buy this bar;

end;

 

setstoploss(n*(50*(StdDev(c,10))));

 

setprofittarget((0.5*n)*(50*(StdDev(c,10))));

[WWWW 10]

I will copy and paste all of your thoughts and opinions in my "cookbook", re-read, sort through and internalize them.

 

Again, thanks for your contributions - both philosophical and specific.

 

I hope that I can return the favor one day and more importantly, that your year is profitable and fulfilling. (I need the same!)

 

Take care.

[GoodTrader1 10]

I am very strict with my hard stops. We must leave some room for price movement, but the bare minimum.

 

The market is full of possibilities, no matter if the stop is triggered, the important thing is to be in tune with the market and trading opportunities appear for themselves.