candle, You bring up everybody's problem. The solution is neither (1) or (2). You'll go broke garanteed with either one. You need to get away from this and find something that works better. It's useless to ask: "What do you do specifically and why? " Somebody who really found out is never going to tell you. This is my best answer.
If you donât mind Iâll tell how I found the stop I use. I took for over 1000 trades the following data: Entry and exit price Biggest open profit and biggest open loss I placed everything in an excel sheet and compared my original trades against various stops. For each stop I recalculated the profits and the drawdowns. At 2 points stop I kept almost all my profits and had the lowest draw down. Each trade that was stopped out at the various levels of stops have been analysed again. Because when that trade was stopped out I had to check if there would be a new trade that could be generated before the next trade in the original version. These additional trades had to be done and added manually. Lots of work, but necessary to find the correct stop.
I have done a fair amount of review, both backward and forward, before implementing the stops that I use for my present method. It does not always yield the best results, but then, nothing always does. I would not characterize my testing as extensive. Rather, it was enough to give me a reasonable comfort level. You see, regardless of the historically best relative stop size (which may or may not carry over into the future), I am simply not comfortable with loose stops, particularly for less-than-ideal setups. I would rather have fewer, and hopefully better timed, trades as well as some opportunity cost rather than not missing any important moves but potentially suffering a string of larger losses along the way. That would take the starch out of me, regardless of the "expected" and eventual bottom line. Also, by using generally tighter stops and being a bit more selective in the setups I take, I can up the leverage for a given dollar level of risk (at least on the better setups). These tighter stops are not really arbitrary in that I have tested them in the context of my method and I keep them fairly consistent relative to the preceding volatility. I'm sure that none of this comes as a surprise. But let me repeat something I wrote in my earlier post. My approach to stops is in the context of my own method, which may be quite different from your trading method or that of other respondents. Therefore, discussing the relative value of stop size may not be very meaningful when we are each probably referring to entirely different timing methods. Your own testing should give you an idea of what is best for your own method. But I'm sure you know all of this.
I use protective puts and calls instead of stops. I find that they eliminate most of the problems that have been mentioned in the previous posts. The downside is of course that you have to pay for this protection. However with the vix around 10 and the tendency of retail option traders to be short options this strategy is quite feasible. I have even managed to make my long option positions into a small profit center. The real key is knowing when there is going to be volatility that will let you out of long option positions.
My research was not quite as extensive or quite as systematic, but it was along the same general principle. Although I began with a spreadsheet, I confess that at one point I abandoned it. It was essential for me to scroll through the charts and view the landscape. Over time, I was able to objectively (arithmetically) discern a reasonably safe spot for a stop in the context of the price action preceding the setup. It took a while, but it feels like home (most of the time).
i am an intra-day trendfollower small losses large wins under 50% win rate 2:1 and up risk/reward i also stop trading in a day when i've lost 2% of prev. day's equity (2% from the bottom or off the top) trade management is based on cci readings oh and i wait till new trend or an 200 cci reading to look for a new trade after i've had a winner think that's about it. very simple. my rules take up no more than half of a 8.5X11 sheet of paper. i trade futures. i should also add, i have a crash stop of 10 ticks (which isn't meant to be hit)...i'm typically out well before that happens. Since my avg. loser is under 10 ticks, then 10 ticks is wide enough. The 2% rule also keeps me from being chopped up...as well as my trade entry rules.
I use a wide stop. I call it a "fail-safe" stop. This is the maximum I'm willing to lose on a particular trade. The way this works though is that first I make a trade based on some set of criteria. Once I'm in the trade this "fail-safe" stop serves to give me plenty of room to observe how the trade is acting in connection within the set of criteria that I used to make the trade to begin with. What I'm looking for is whether the trade is doing something that would indicate that the original set of criteria that I made the trade with is doing something that would indicate that I'm wrong. If it is, then I simply get out. I don't wait to get stopped out. That's why I call it a "fail-safe". It's only there in case the trade is so bad that it moves directly to the stop. I haven't been stopped out in that manner in a long time. That isn't to say that I haven't lost money. What does not get me out is a trade that moves a few points against me. I think that can simply be noise. As long as my opinion is unchanged regarding the details of my trade, I stick with it. Now, as I've mentioned many times here, my trades are not based on what a 5 minute chart might say. Rather, I'm much more apt to trade based on where we stand within the daily chart, or what is happening in some of the sectors or key stocks during some particular day. Because of this I find it hard to pinpoint my timing. I'm what these days is called a "discretionary" trader, if I understand the term. I'm willing to make my trade early to make sure I have a position, and then wait for it to move my direction. I try to anticipate future events. Because I'm early alot of the time, I need some room to let my trade develop. OldTrader
Dan, tear off the other half and I can use it for my plan. Thunderdog makes some good points, also. I'm small stops.....then move on to next setup.
stop placement should be based around volatility, liquidity, typical spread, and the general character of the market. but perhaps most importantly - personal comfort, which as it happens is pretty abstract from the market. objectives are another issue. the guys who say they only risk a few ticks may be fine in es or ged, but they will get killed doing this in bp. of course, these good meaning people are talking from their own valid personal experience - which unfortunately has little to do with yours. is your stop placement actually based around your own self-image? so, heres to the start of another 60 page thread as we go round and round the houses discussing various shades of grey. then grob will come along with his words of wisdom, and people will tell him he is a bull shitter. the thread will then go off on a tangent of abuse, only to re-emerge on page 36 by which time the subject will be break out trading or something off the wall. yours col. kurtz (prophet extrodinaire)