Stop Loss

Discussion in 'Trading' started by SHORTY, Oct 7, 2001.




    Does anyone know whether I should avoid placing actual stop losses and simply use mental ones? I heard a lot about insiders gunning for these stops and see many cases where prices are pushed through S/R only to retrace either immediately or the next day.

    Is there a way of telling which stocks are more likely to see this gunning and consequently avoid placing stops?

    Is a better option to put the stop further from S/R or does this just increase risk?

    I am often not able to watch stocks during the day and I'm trying to second guess insiders and am not sure this is possible.

    Any experience or thoughts would be appreciated.

    Good Luck and Big Profits,

  2. Magna

    Magna Administrator


    The key to your questions came when you said:
    I am often not able to watch stocks during the day

    As that's the case you don't have a whole lot of choice, and mental stops simply won't work for you. If you find they keep just getting taken out when you place them at S/R, then you'll need to place them a little further away. There's no exact formula, it's a matter of trial and error. Some people set them .05 away, some set .15 away, it all depends on the volatility of the particular stock.

    Since giving stocks more room does increase your risk and potential loss, you will need to compensate for this by adjusting your position size. That way you keep your actual dollar risk to within your money management parameters.


    Hi MAGNA,

    Thanks for the response. I've often been tempted to keep a close stop to minimize losses while placing another order out at 3-5% beyond the S/R violation to take advantage of this gunning and subsequent return to the trend, Any thoughts?
  4. Take a look at the size of the typical false breakout for the stock that you are trading and then set the stop to just beyond that value - sometimes referred to as "adding fluff".

    Tharp recommends using the volatility of the stock to set the initial stop - e.g. 3x its average true range over the last 10 bars. This has the advantage of giving a fairly "unpredictable" stop level. Position size accordingly to control risk.

  5. When I have to place a stop I prefer to use a $ amount. I know about what I expect to make on a trade and I like to keep my risk/reward about 1/2 so will use half that amount for a stop.
  6. vinigar


    Thanks for the idea of adjusting position size in conjunction with your stop, money management and volatility of the stock you are trading.:)