I'm hoping to get some feedback from traders who use (or have used) stop orders to enter trades as opposed to limit orders. Here's why: I recently transferred part of my trading account to IB and while learning the platform and learning to manage multiple DOMs, I committed several order errors and a couple of these errors resulted in accidental reversed positions that became immediately profitable. As an example, I was trailing a buy stop on a short position that was very close to major support. I wanted to ride a further breakdown, but also wanted to exit quickly with max profit if buyers piled in, which frequently happens at major support levels. I had doubled the quantity field much earlier thinking to add the position, but I never did add to it and so when I put in the buy stop it was for twice my position size. When the stop was triggered the short was covered at a nice profit and I ended up long an equal size to my short. The long immediately became profitable and I was able to capture a nice move on the bounce. This got me to thinking: Entering a trade via a calculated stop should in most cases place you in the direction of the momentum. For example, if price has been trading beneath a falling moving average, and rallies to the MA line and I place a sell stop beneath that MA line, I will catch the next continuation of the downtrend in the direction of the price action. If price keeps going up, I've saved myself from entering an unprofitable trade. The stop is basically placed at a price level that would confirm what you currently "believe" should happen. I actually used this intentionally for the first time Thursday when STEC started a downtrend after failing to make a significantly new high on the day. The double top catches my attention, the failure to resume the uptrend off the 20-period intraday MA provides confluence, then as price approaches the previous support level I decided to place a sell stop just below that previous support level, assuming a breakdown of that level would trigger further selling and I'd catch a ride in the direction of the breakdown. It worked perfectly and my only mistake was covering at the next support level instead of waiting to see if a further breakdown was in order. (As you can see from the chart, I missed the majority of the move.) So as a newer trader, I'd like to get some feedback from seasoned traders on the long term success of this method for both trend-following trades as well as for counter-trend trades off S/R levels.
This sounds like my lovely wifes` (sell / sell), (buy / buy) theory of trading. As a trade approaches resistance she moves her stop up closeout sell full tier. She also has another stop a bit below that to closeout sell tier full again. When the first stop gets taken out the second stop is in place to catch a fast retrace, then the process starts all over again as a short and hence the (buy / buy) goes into effect. If things go against her there`s usually a string of really obscene phrases and a very quick exit. She likes volitile stocks over 25mil. a day in volume and a range over 1 point. She only trades a couple of hours a day, her short attention span coupled with high intensity. I`m much more methodical and can`t take the stress of her terminal intensity trading theory. Johnny
Yes, exactly the strategy I've been contemplating as a result of my observations, only I call it the "double stop" theory (I'm a musician). I love it! It must be a gender tendency, as I too am a woman.
Stocks may be different, but I find that I usually get killed entering on stops in ES (maybe it's my unique problem). On that chart you posted, if that were ES ... you'd have to be a little careful as the "support" below which you went short looks to me like a possible 1st p/b in a new trend. ES will often come back to kill the stops of all those who entered long on that 1st p/b, only to continue northward after punishing the early longs. Wasn't the case this time, but I see it alot. Anyway, my personal preference is to enter where I think others' stops are, on a limit. Good trading.
Interesting how different traders see different things in the same chart. What I saw was: Price tests the high of the day, makes inroads of a few pennies and then HUGE selling volume comes in, drives price below the 20-period MA and right to the 10-period MA. Here some trend followers come in to the long side. There is a complete failure to thrive at that point and price breaks through the 10-period MA, resulting in a now-falling moving average with price below it. This is a strong signal that the trend has ended. The final confirmation for a short trade comes after trend followers hang their hopes on a higher low than the previous 24.75 support level. Just after 11 a.m. you see that tiny hammer doji on average buying volume just pennies above the 24.75 price level. If the stock can't maintain upward momentum off this level slightly above 24.75, it should fall hard and my sell stop will catch the momentum.
In this case you are absolutely right ... I mistakenly disregarded that huge volume bar, going on price pattern alone. In ES though, I think you would rarely see such a volume shock without a corresponding price shock, which is what I was probably projecting here. I know you trade this stock frequently so I have no business talking about the chart as if it were ES. I will say I rarely look at intraday charts in a vacuum, so my analysis would really depend on alot of other things, such as what caused that first support at 24.30 and how strong I think it might be (helping to determine whether to even consider longs). Anyway, your analysis seems to be spot on. As I said, I am skittish about entering on breakouts on stop orders, but sometimes they do work, obviously.
Stops look great on strong price breakouts with no chop or retracements. I never go into a trade expecting that to happen as its unusually lucky to catch those moves( for me).
In general I don't use stop or market orders. I use limit orders continuously as I am in control of my trading and ought to know what I am doing. I get PMs, asking questions, from time to time which sometimes I don't even have the time to reply to but I set out here, briefly, a few answers. Price and Time Assuming daytrading in a liquid futures market (eg CL,NG, YM),look at the gyrations (gyration = upswing & downswing or vice versa) using minimum 35 points bar close to bar close. You can note the durations (in minutes) of the swings. Take CL 10am-2.30pm Thurs July 1, 2009: 21(46 up), 33(176 down), 15(52 up), 42(141 down), 12(75 up), 55(104 down), 17(44 up), 30(83 down), 15(65 up),17(59 down), 11(86 points up). The maximum points, up or down, of each swing are noted in brackets. Your system needs to set buy signals at the bottom of each gyration and sell signals at the top of each gyration. Taking Points from the Market Without getting to know the metrics of your market you are blind and relying on instinct. Aim to take a major portion of the points from each swing. You can allow, if you want to, a generous margin on taking positions on turn-arounds at the bottoms (buy) and tops (sell) of gyrations. Number of Trades per Day These correlate exactly to the number of swings. Or if learning, and using the example of CL, you can focus on the more volatile period 8.30am to 11.30am which is the first half of the trading day. S/R Support and resistence is varied as to what levels a trader thinks or chooses and so its outcomes are erratic. It is right as often as it is wrong and I donât use inaccurate tools. My background and perspective is professional and so the metrics of a market are not considered by amateurs or at ET in general quite apart from the large amount of work entailed in tabulating such data and establishing comprehensive datasets.
Cheese, in a nutshell, you've delineated a method I've been innately using to "paper trade" ES past few weeks in preparation for going live (I've only traded stocks and options up to this point). Your post makes more tangible something I've been doing instinctively. Thanks.