How do You set your Stops? Got favorite ideas?

Discussion in 'Risk Management' started by KCalhoun, Apr 18, 2021.

  1. KCalhoun

    KCalhoun Sponsor

    I'm curious, do you use hard stops or trailing stops most of the time? I have tried using both and found that trailing stops usually shake me out of a position earlier than is good. I'll often use both when I'm scaling into or out of a trade.

    Are there any specific rules that you use? For example in swing trading I add to winning positions that are taking out new two-day highs and scale out of losing positions that are taking out 2day lows.
    murray t turtle and Tradex like this.
  2. Stops are always a guess. In general, you want to place initial long stops just below chart support and short stops just above chart resistance. As for trailing stops... they are a guess also, but long stops could reasonably go just below "rising bottoms" support or "prior dip low" support... vice versa for short stops.

    And then there is the other, more aggressive kind... where you place a stop VERY close to the entry, risking the smallest. Why? Because some moves go in your direction almost immediately with very small or no move against you. This method will capture some of those gains though has more of a "gamble" element to it. Of course with very tight stops, you're more likely to be shaken out by "noise".

    No pat answer. It's all strategy and guesses.
    Last edited: Apr 18, 2021
    KCalhoun likes this.
  3. Tradex


    No they are not, if you backtest any trading system (assuming the trading rules are clearly defined) then you will find that there is only one (1) optimal stop (and/or trailing stop).

    In other words, any other stop will produce inferior results and a bigger drawdown.
  4. easymon1


    What works best for your system, Mr T?

    I like the standard advice For Double Tops and the like, for example this one:
    Multi-Timeframe Trading -Trendline -123 Pattern

    Looks like somebody had some sell-stops under that bottom chart's steep trendline. Crafty devils.
    Last edited: Apr 18, 2021
    KCalhoun likes this.
  5. Tradex


    A hard stop, nothing beats that, as far as my systems are concerned.
  6. easymon1


    Sounds good. How do you decide where to put the stop?
  7. Tradex


    It depends on the logic of your particular system, of course.

    For instance you mentioned the ABC pattern earlier. Where would you put the stop in that case, for a short position for example?

    Well, you backtest this ABC pattern (say with 20 or 30 years of 4h charts) and you find that the previous swing high is the optimal stop, so that's your stop right there.

    Again, it's all about backtesting your trading ideas and finding the OPTIMAL move.

    Of course "discretionary" traders have no way of backtesting their systems, they are basically trading in the dark.
    Last edited: Apr 18, 2021
  8. KCalhoun

    KCalhoun Sponsor

    Great points everyone....

    Stops can be a real pain in the butt to figure out, but they're absolutely essential. It seems like I have a fear of missing out if I stop out at the day's low for a swing trade, or just above pivot support for an intraday trade.

    For swing trading, I found it helps a lot to use the simple 2 day high and 2 day low rule. Day trading gaps is considerably more challenging; I often break the trade into two decisions when it comes to entries and stops.

    Does anyone else spend a lot of time figuring out the total dollar cost per stop? Often I will decide how much I'm willing to risk on a trade, then trade the number of shares that meet my stop loss criteria for example.
    Tradex likes this.
  9. Tradex


    The only problem is that Mr Market does not care about our budget.

    Personally I discovered that risking exactly 2.7% of my capital is the optimal move, and this percentage gives me the right number of lots/shares/contracts to buy or short, according to the size of my (optimal) stop.
    Last edited: Apr 18, 2021
    KCalhoun likes this.
  10. Overnight


    Swing trading is a subjective term. Have you visited my journal lately, and looked at the time stamps? I'd be totally rich if I never closed my swing trades at the very bottoms, because indices do nothing but rise.

    You trade many individual stocks at a time, so that is more of a challenge, to follow each one and figure stops for each stock.
    #10     Apr 18, 2021
    KCalhoun likes this.