3 Simple Rules for Stop-Losses
A U R E L ?? I.
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1. Actually Place The Order: This may seem obvious, but setting a level in the mind has resulted in spectacular losses for me and anybody who has ever traded. The human mind is a funny thing. That obvious level to cut can easily become an obvious level to buy more, and average the position. Most online brokerages make it simple to place a stop-loss order with only a few clicks, and doing it at the time you make the initial trade is a good habit to get into.
2. Don’t Use Round Numbers: People are drawn to round numbers and, believe me, floor traders know it. In the example of RIMM above, setting a stop at $9.00 exactly wouldn’t have mattered, but it can. Stocks will often touch a round number or obvious chart point, trade a few cents below, then jump back up. It isn’t a coincidence. Taking a loss of a few pennies more is worth it to eliminate that risk. Again using the scenario above, I would have set a stop at $8.91 and taken an extra 1% loss to protect against a false push down.
3. Don’t Place A Stop-Loss Too Close: Lots of small losses are as bad as one big one. How close is too close depends on several things. First and foremost, it depends on your own pain threshold. This could be limited by the amount you can afford to lose, your attitude toward taking a loss or both. The nature of the investment is also a factor. Setting a tight stop for a volatile stock is asking for trouble, and setting one too far away for something stable is pointless.
There is no magic formula for making money, but it is impossible to make money in the markets without taking on risk. Stop-loss orders are an effective way to control that risk. Understanding these three simple rules will help you to use them successfully.
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Serial Entrepreneur??Technologist??Quantitative Trading ?? Inventor ?? Renaissance Mind ??Poliglot ??Polimat ??Bio-Tech ??Blockchain ??Arhitect??
8 年After 19 Coments this are my conclusions It's better to set SL first. Then entry. Rather than Entry then to set abritrary SL. Usually based on a dollar amount kind of stuff. Advise to loosen the SL if too tight. Because Losses can add up quickly, Even if your idea turns profitable. Eliminate the false negatives. To be taken out on winners. Size's more important than price. But often we prefer to add contracts, Rather than to increase,widen, the SL. After it depends ... What's your Expectancy ? With a tighter or a wider stop loss ? I'd personally go for less leverage, But a wider stop loss. For less False Negatives. Which is to lose money on a trade that's actually not bad. To let room for noise from Algos and scalpers to be harmless. Some take volatility into consideration, They say tight / loose SL when non volatile / volatile. Depends ... It's conditional on volatility, entry, expectations. But not on a dollar amount or other arbitrary, abstracted, parameters. But always have a predefined exit point. And STICK TO YOUR PLAN. PS: One Key Word here is OPTIONALITY With wide SL you still have the choice to get out tight. Where on tight ones, you're taken out, even if still convinced. Plus with wide SL. It can gives you an opportunity to break even.
Auteur du livre Comprendre les Options (stratégies de base). Formateur au trading sur actions, options et futures à l'Atelier des Options
9 年You can also use options instead: https://www.celtinvest.com/mettre-un-stop-est-une-erreur
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9 年Another area where an overly simplistic view of reward/risk falls down is assessing the reward/risk profile of a trading system. Instead of generically thinking about reward to risk, consider three distinct measures: 1. Targeted reward/risk 2. Current reward/risk 3. Effective reward/risk Targeted reward/risk is what we commonly refer to as the reward/risk ratio. It is based on the reward/risk profile of the trade prior to entry. For example, if you are looking to make 3 units for every one unit you risk, then your targeted reward/risk ratio is 3:1. The current reward/risk is the live reward/risk profile of your trade as it changes throughout the lifecycle of your position. For example, you might start with a targeted ratio of 2:1, and then after you are in the position, you adjust your stops, take profits, or add size to the trade as part of your trade management rules. As the live trade progresses, the current reward/risk profile may vary drastically. (One note — Van Tharp recommends that you never let your current reward/risk ratio to decline to less than 1:1 while in a trade.) Improving Reward/Risk Ratio vs Static Reward/Risk The effective reward/risk ratio is your ending reward/risk profile across a number of trades. For example, your average winning trade in a system might be three times larger than your average losing trade. In such a case, you might have a targeted reward/risk of 2:1. If your average loss is 0.3 and average win is 0.9, you would divide your average win by your average loss to reveal an effective reward/risk of 3:1 — substantially better than it the initial or targeted reward/risk ratio. Of course, you might have the reverse. A system that targets 3:1 could end up with an effective risk reward of 1.5:1 or worse. It gets really interesting once you start running comparisons with win rates factored in. For example, would you rather have a trading strategy that makes +0.9R on average and loses -0.3R on average (for an effective reward/risk of 3:1) with a 60% win rate, or a system with a targeted reward/risk of 3:1 and a 40% win rate? Without a detailed knowledge of reward/risk, many traders would choose the system with the 3:1 targeted reward/risk and 40% win rate. But if you grasp the concept of effective reward/risk analysis, you might find the system that makes 0.9R just suits you better. It would probably be easier to trade so you would make fewer mistakes and the resulting higher quality would allow you to trade it with more aggressive or more creative position sizing strategies.
Managing Member at Villicus Capital Group LLC
9 年I like the hard stop because it's very difficult during a high volatility period to be watching all positions at once.Also, sometimes you can get major slippage due to velocity of price movement by the time you actually get the order in. I personally use stop limit orders both on the buy side as well as the sell side. It gives me the flexibility to assess the situation if there is a price gap due to some news or event.
Senior Business Analyst Market Data
9 年There's always the trailing stop to break even as well that makes a nice level for the stop loss