Trailing stop/Initial stop on futures

AllenZ · Feb 21, 2003

Quote from OldTrader:

First, you got some really fine responses in my opinion. I particularly liked AAAintheBeltway and Profitseer's answers.

Setting a stop has alot to do with your style of trading, the volatility of the market, and how you enter the market. That said, a 2 point stop wouldn't work for me.

Really, the idea of setting a stop like this....a particular point amount....is really trying to "game" the market. But it really has nothing to do with the market per se. The market can fluctuate 2 points for absolutely no reason at all. Take today for instance: you could have shorted the ES at the high of the day just after the opening. It moved 3 points in your favor, and then back to the high of the day. Somewhere in that process you would have been stopped out. It then took the lows out, and rallied another 2+ points, before continuing on lower. See the point? It's just fluctuating in the process of moving lower. It continued this process until about 2PM CST, when it hit it's low of the day.

Now, I don't know what type of trading you're wanting to do. But in order to ride that move down today, you had to do something less mechanical than trail a 2 point stop. If you're trying to "game" the market, find a stop that's ideal, then I think you'll be in for a long, frustrating process. But that's just my opinion...other's here may have a different view.

I set a kind of "failsafe" stop similar to that described by AAA and Profitseer. It's a very wide stop, which is there more or less for disaster protection. and nothing more. I set it with an eye toward volatility, but these days I've been mostly using 10 points.

I can almost here the wails going up over a stop of that size. And certainly I have no real intent that this stop would normally be triggered. Again, it's just there in case something unusual happens during the time I'm in the market. That 10 points is as much as I'm willing to lose on a trade.

But hear this too: I trust my market judgment. But I also know that sometimes I'm too early. Sometimes it needs to top or base first. And therefore, I give it room to do so. I let it develop. At the same time, I watch carefully to see if it's doing what I expected. If it starts to give me feedback that is not consistent with my expectation, then I exit immediately. I don't wait for the stop to be executed.

Sometimes, what will happen is that I'll get on the wrong side of the market, and let's say it moves 5 points against me....but at that point, looks due for a reaction. I might wait a little for the reaction, and then exit at that time.

But as long as the market is acting in ways that are consistent with my expectation, I stick with the position. I don't move a stop in there for them to hit. A 2-3 point move against me I'll sit through as long as the underlying reason for holding the position has not changed.

Now let me tell you something: I don't know of any other way to stay in a big move. Because sometime during that move it's going to move against you, and if you have a tight stop in there it will knock you out.

What I've found is that if you have the direction right, if you get out on a very tight stop, chances are you won't be able to get back in at a better price.

Now, this is just me. And again, I'm not a scalper. I believe in watching the market, exiting when it starts to act in ways that lead you to believe the move is over....and not just because it reacted a couple of points.

OldTrader
More...

Simply awesome post.................period.

AllenZ

splphil · Feb 23, 2003

Trailing stops is always a big dilemma. Having a big stop gives you bigger average losses, having a small stop gives you more of them. When testing automated systems I have found that the great majority of times, a bigger stop will improve results by a great degree. If you decide to daytrade the S&P, take a look at the stop I use as described in my manual (free) which is downloadable at www.sp-levels.com
You can also give the TrendLevel indicator a try (currently free).

All the best,

Phil

harrytrader · Feb 23, 2003

Let's conclude:

Asking about stop and trailing stop is almost equivalent to asking how can I made a trading system that works

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Trailing stop/Initial stop on futures

AllenZ

splphil

harrytrader