Stop Action

Discussion in 'Trading' started by sundownr, Mar 21, 2010.

  1. sundownr


    I recently developed a back test engine to experiment (paper trade) with ETF’s. I have found after testing thousands of funds setting the right stop is super critical to successful trading.

    If you have a spread sheet application like Excel it is easy to get a handle on stops. First get your stock data (I use Telechart) into a text file (open, high, low close) and then import this data into your spread sheet. Next build a formula in the first empty column and drag it to the bottom of your spread sheet. The formula should look something like this ===> E1 = (D1-C1)/D1. In other words you are subtracting the low from the close then dividing this result by the close. The computed value is a percentage value showing the difference between the low of the day and the close.

    To chart this data you just manufactured select the new column then (in Excel) click on ‘insert’ at the top of the application window and then choose ‘line chart’. Note it is best to make 2 charts. One chart of all your data and another chart of the last 90 days. The 90 chart allows for viewing your chart data with much better resolution.

    If you started with at least 2 years of data you should easily see a wide variation in daily stop action on the chart you just made… meaning you can now see what percentage of the price it takes to stop you out on any given day. The percentage stop range can often be from 1% to 10% or more depending on the volatility of the security.

    The best way to set a given stop is to pick a period (like 21 days) and then add up all the computed values for the last 21 days and then divide by 21. This will give you a ball park percentage where to best set your stop.

    By back testing up to 20 different stops on a single security I found my profit ratio could vary by 2 to 1 or more… need I say more. Understanding where to set your stops is fundamental to successful trading.