I would like ideas about setting stops and Trailing stop losses. Right now, I am trading at work and I am just trying to get in and out fast. I am using IB with Quotetracker for my charts and Bracket Trader to help me make my trades fast. What are some of the theories to using the stop and trailing stop loss?
I know the emotionally comforting thing to do is use a real trailing stop in the market. But you will get stopped out of an enormous amount of big moves using a trailing stop simply based upon market ticks. My experience, albeit limited to only a year of futures trading, is to pick a time frame to trail your stop with on charts. If the market retraces to your stop, don't panic and get out WAIT until that bar closes. If it closes at or above your stop, get out at the market. If it doesn't and you find the market has returned to your desired trend, stick with the trade. The point is, you could use hard stops on your stop losses. By using hard stops on your trailers you are giving free money to the arbs and the noise traders. I find this method of using hard stops ONLY on losses keeps me in the marginally good trades to eek out profits where I wouldn't had I used hard trailing stops. I'm sure there is an enormous amount of conversation on this matter in the archives, take a look.
Theories of Stops are: 1. Stop-Loss. Putting a stop at where you would consider, your trades to be wrong. Personally, all trades are biases of what the market will do. So depending on your style of the trades you make, you put a stop at where you would consider the bias to be wrong. Some get into statistics and some use conventional chart pattern or condition for the stops. It all depends on the entry you use. Personally, the stop losses are the reverse of your signal. Having a mechanical or set stop-loss is recommended because by having the figure, you can use position sizing or different kinds to risk management. 2. Profit taking. Personally, this is the hardest to make. The reason is we have a choice of when we want to get in. Taking a loss is just part of the entry and disciplined loss acceptance. But taking profits are an obligation with a choice of when. Trailing stops are part of the profit taking technique and I personally, have 2 criterias. a. Identification of change in trend. We enter under a bias of some move like trend is moving up. We exit when the trend has ended. But the problem with this is usually the sign of change in trend is very lagging because for entry, we have "fitting" setups and conditions but for exiting in a change in trend doesn't happen that way. We can't exactly place a "fitting" setup and condition for an exit because we are obligated to liquidate a position at some time. b. Risk Management. Basically, you work with your equity. You don't want to take a loss after a profitable trade but you also don't want to liquidate in a minor retracement when the trend moving with you. Ultimately, you trade to make money and keep the profitable trades profitable. Keeping profit-taking criterias based on this is very important. Well, that said, it's a balance between the 2 criterias. I'd say "Risk Management" based on the "identification of the change in trend". Just my 2 cents.
Don't rely too much on theories. Backtest your ideas to see what your MAE are for your trades and based on that find out how to handle the stop-loss and how to use the trailing properly. A lot depends on your system if you have any or on your setups, but the latter should also be backtested to see what their MAE and MFA are.