stops 5226

I apologize if im being too cynical. Trust me its something that has been earned after following countless blogs over the past few years. Basically , how can you enter a trade without a stop ,or perhaps a better way to put it is, how do you know what your risk -reward is when entering a trade? ..best of luck to you Blue!

I am going to make my post on stops in here, since that is the topic of this thread. I mention this because in the thread Uncertainty and Risk in Short-Term Trading there have been some excellent posts on stops that I wish were in here just to keep it organized and coherent. So, check that thread out before continuing here to get an idea of all the ideas being presented.

I thought this was going to be a long post, but many of the ideas have been covered by PT's excellent posts. I'll just add on my own thoughts and twists.

My style of trading is completely technical, based only on chart patterns and such. I see something set up, on any timeframe, and any issue, I really don't care, as long as it is liquid, and I assess the setup and make a trading decision. In this manner, I think I am on the exact same page as Joe, who seems to be on the opposite side of the coin, saying he doesn't use stops. I think we just need to clarify our definitions. I think Joe totally uses stops. He says on a long trade he stays long until he is no longer bullish. Then he takes the trade off. He totally has a stop, and it is activated as soon as he is no longer bullish. To me, that's the very definition of a stop. Something that triggers you to exit the trade.

Nowhere in the definition of any stop does it say this must be at a certain amount from entry, or a certain amount below the reversal point. A stop is anything that triggers you to exit the position. Now, here's my definition of when I decide to stop out: I stay long until I'm no longer bullish. Hmmm, same thing Joe said. Now, as PT mentioned, I am a technical trader, and when a long side pattern is invalidated, at that very instant I am no longer bullish. Hence, I stop out. This is a technical thing that I can determine at any give time from the chart. At any given time I know exactly what price must do to invalidate the pattern. This changes over time, so the stop is always moving, but at any given time it is very technically obvious to me exactly where that point is.

Joe mentioned how crazy it is to have the stop the same during the morning volatility as in the slow afternoon. I couldn't agree more. But, that has nothing to do with using or not using a stop. Nothing about a stop says it has to be x number of ticks from entry, or y ticks below the reversal point, or anything like that. My stop will be technically placed, and that placement has to do with each unique setup and situation. The volatility of the issue, the setup size (the size of the pattern itself), the current immediate volatility, the time of day, the proximity of potential stops that may be gunned, it's all factored into each unique stop placement based on about 34,000 screen hours working this out. Please understand, I never mention the total hours to sound important, I mention them for one reason only: to point out how much work I have put in such that when I say I can technically analyze a chart and place the stop in two seconds flat, I can do this because of the practice I've had, the work I've done, the skills I've amassed over time.

The bottom line for me, after having worked up tens and tens of thousands of charts over the years, is that if that stop is hit in most cases I would not have wanted to stay in the trade, and even if in some cases I would have wanted to, in the overall, all the cases, I would have been worse off had I not stayed with the stop. That only makes sense, as I have worked out the stop technique based on the premise, from experience, that it would be beneficial. Whether this stop is a hard stop (I prefer a hard stop in pretty much all cases) or a mental stop, the point is to never trade without knowing when you would get out.

Again, none of this has to do with doubling down, adding to losing positions, or any other topics like that. I could add to a loser, double down, do all of that (I don't use those techniques), and still have a stop in place. A stop plan can be crafted to take those possibilities into account. The point is to know when the uncle point is where the initial premise is invalidated. For me to enter a trade and not be able to say what would make me get out, that, for me, would be total madness. Even Joe says he knows exactly when he would get out, when he is no longer bullish, and that is a very specific set of conditions that his vast experience would point out to him as soon as it manifested itself. So, I contend he uses stops much the same as I use them.

Well said Jim. I have never thought of stops in that manner. thanks

kool,

you never replied to my question:

In a market that is forever and constantly changing how could a predetermined decision be better than one that is monitored by constant evaluation?

ex. Lets say I feel that the market is gonna head fake and turn south around 10am...it does and I find a good place too short. With preset stops (i guess your talking about stop profits as well) you have an exit for +15 on this particular day the markets have traded themselves into a wedge over the last 2 weeks and have shot down out of it and is good for at least another 30 points. You have 7points by mid afternoon half way to your stop profit. Several things could happen at this point, things have climaxed and slowed now where making a higher low to late in the day. Do you still stick to your original plan of risk reward that was made over 3 hours ago with a major portion of the days events shadowed? Do you really think the analysis of 3 hours ago is more exact than current market conditions? Hasn't risk reward changed in some way?

"In a market that is forever and constantly changing how could a predetermined decision be better than one that is monitored by constant evaluation?" quote..... As Jim pointed out , i frequently raise my stop if conditions warrant! Gosh JOE , you used to trade with me a year and a half ago ,remember? Nothing is 'etched in stone' . Ill adjust my exit frequently also ,if conditions in my view warrant . The main difference between us seems to be , i ALWAYS have a stop in place during a trade! Always. That way, if i go to the bathroom and some nutcase pops a cap at the PRES. I DONT COME BACK TO FIND MYSELF 30 HANDLES IN THE HOLE! Cant remember the circumstancces ,but that actually happened to me in a t-bond trade once back in the day! (the 80's) . In fact i dropped around 2500 while on the phone with my broker just trying to get out! Like JIM and P.T. and yourself , i usually know when im wrong.

kool,

No hard feelings. The post did kinda sound demanding. Thats the downside of forums I guess, I have so much going on didn't mean to come off hostile in any way just talking to fast. I remember some Sunday years ago trading the ES and they shot up and down like 30 <the normal day range then was like 7-12 points) points I actually almost shorted right before that, like 2 seconds before....I remember being so star struck because I almost lost a large chunk of my account, cause I know I would have bailed at the top like everyone else. I really dodged a bullet, I was over trading at the time 15-20 contracts. Would have been a blow I could not handle back then mental and monetary.
The reason I am so hard on this stops thing is because I went down a road of stop profit/loss trading, and almost sucked my account dry. I would place the stop too tight only to watch it stop me then head in the direction I thought it would. If I had a wide stop the pay off wasn't there. Took lots of thinking and soul searching to get to where I could not be so stressed.

Absoulutely no offense taken! Your questions are excellant. (in fact i clicked you for it!). I was surprised, not upset! Its just my account is so small (i keep it under 10 large) that an unexpected 5-10 handle hit really hurts! I believe its in discussions like this thread , that the forum sees its finest hours! I learned so much from you (1100.50 sq root plus .382, multiplied by itself=) and Bruce, P.T, and VO THAT HAS MADE ME A BETTER TRADER. Thx.