Age old question but let me hear how you rationalize where proper stops should be set. Please keep in mind that this is for initial stop loss only, i.e. as soon as you get filled on your initiating order. Few things to consider: 1. Do you have a fixed ticks stop loss? How do you determine what fixed ticks to use? 2. Do you use a dynamic stop loss based on volatility? 3. Do you just have a target vs stop setup (no in trade money-management)
1. Makes no sense, I never use a fixed ticks SL. 2. Currently using 2 x ATR20. Intend to trial trailing this after entry (revising the distance to the SL of course as ATR changes) 3. I don't set take profit targets, doesn't make sense in a trend-following style, but if the trade moves 2 x ATR20 in my favour in one single session, I would close it immediately. Otherwise, looking to pyramid the position when it makes 2 x ATR20 profit.
Stops are an art, no right answer... other than you must use them. As a general rule your entries should be near support/resistance with your stops a bit on the other side, allowing for a fake-out/overshoot buffer.
ATR is the gold standard but some other vol based indicator would do as well. That being said I despise stop losses. I would rather use options so you don't get stopped out on whipsaws only to have the trend continue in your favor.
can you describe more about ATR20? Do you mean the 2x the value of ATR20 upon execution of your strategy?
it is an art to properly set them. but yes, it needs to be done, i guess like putting in brakes in the car. This question is especially difficult for trend strategies as you need to give room to the whipsaws and of course, still stay in for the trend...
ATR20 is Average True Range averaged out over 20 bars - daily bars in my case. The range is the distance between the day's high and the day's low. ATR20 is a commonly used averaging period and many traders use 2 x the ATR20 as a way to calculate how far away to place a stop-loss: so, price would have to move more than twice the average daily range from the last 20 days in order to hit the SL - pretty unlikely such a move would be due to noise or just normal volatility.
Better to stay away from price action likely to whipsaw. Your stop is an integral part of your trade plan and no trade plan is identical to another (for long). Mine goes under/over my entry pivot and is less than my average gain. If I can't get in within my risk limits then I can't get in...there are plenty of signals.
I think Clenow uses a 3x ATR (100 day) trailing stop in Following the Trend to mimic a CTA-style fund.
So, you give up 100% in purchase price (of your 'insurance'), rather than 'playing the odds' of a one&done SL? I've done this for investment positions, or for trades that were already troubled, but I've (somehow) never thought about the advantages of doing this as part of an ongoing trading strategy. (I was almost never long in the options market to begin with. ) So, if you "decided" that your loss-limit was $100, rather than place your stop where that would compute, you'd buy a spread ('spread' cuz I'm cheap) at the point where the long_position loss + the gain of the spread ≈-$100, and rather than having your stop get hit, you can hit {Pause} at that point, and evaluate what to do right then according to current conditions, right? If you're delta-matched, you'd only care about what happens from there. Do I have that right? Many many options with these options things....