Hi all, I am an equity volatility trader who is looking to add a directional component to my trading.Like most of you,almost every great directional trader I have read about will not trade without price stops.WE have all heard the Let your Profits run,cut your losses short Mantra. Yet whenever I backtest,it appears that stops significantly reduce the profitability of a system.What is it about Stops that everyone swears by them,yet they do not appear to increase total profitability or the risk reward. FYI,with growth stocks I am looking at an Oneil approach.He is a strong advocate of 7-8 percent stops with no exception to the rule. I also look at things from a value perspective,and I really dont know any value oriented traders who employ a tight stop discipline.. Any thought? Thanks in advance T
Ok, so your long/short and the market falls/rallies 500 ticks in 5 seconds. You don't have a stop, what do you do?
Use Wide Stops that account for a market's potential range of movement in order to remain in the trade. The wide stop is to only be used to get you out of the trade in the case of a disaster. Use Trade Management to cut your losses. DO NOT wait for your stop to get hit....I repeat....DO NOT wait for your stop to get hit. forget about backtesting...you can't backtest trade management.
I am going thru all that now. Perhaps its a style of trading,but guys like Oneil,Zanger and Mark Minervini all stop themselves out at 7-8 percent.And its not like they are trading low vol stocks. I may break the analysis down between value vs growth stock Buying stocks at highs vs pullacks
You break your account down evenly to 4-5 trades, you use the 7-8% rule on each trade. If you get stopped out, you lose 2% or less of your account on a trade. You don't run all 4-5 trades unless the broad market is running and very bullish! You should use stops at the 7-8% loss target unless you are watching the market all day. If you are watching it all day and you have a sharp reversal at or beyond 7-8%, exit at the close as though you had a stop loss market order, hoping for some semblance of a recovery but make sure you get out. Obviously, you trade trending markets only as much as possible.
Exactly! If your stops are getting hit you don't know how to trade. You should be taking yourself out of a trade manually but that requires a lot of discipline. There are also other ways of managing risk. Study the relationship between two instruments such as the 10 year and 30 year. You have to consider the leverage, volatility, tick size, among other things. This is where you take your trading to the next level.
I don't know the fine points of your trading so I probably should not get involved, but let me just mention that some traders don't like exiting a trade mid bar. They want to see where a bar closes before exiting a trade. They know at what price their trade becomes invalidated, but they don't want to exit the trade just because there is a price excursion through the invalidation price. They only want to exit the trade if the close reaches or goes through the invalidation point. Therefore they can't enter their stop ahead of the bar close. They will instead enter a stop well away from their trade invalidation point as an emergency stop and exit the trade manually when a bar closes at or beyond their invalidation point. This is a reason why someone might use the technique mentioned above, namely entering an emergency stop loss order but actually exiting the trade manually before it ever gets to the emergency stop.
Traderz best friends, in no particular order: 1. The trend of The Market 2. The trend of The Stock 3. Low Risk entry / exit tactics 4. coffee