Registered User
Joined: 10/3/2005
Posts: 4
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If you don't mind sharing, what do you use as a stop loss when trend trading?
Also, how do you calculate a risk rating when trend trading?
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Registered User
Joined: 12/2/2004
Posts: 1,775
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Trend trading, swing trading...I do both more or less and use same stop loss method. My holding period lasts days, weeks, occasionally months. In all I simply set my stops under recent support. It might be a line I draw connecting recent support, or may be a moving average line. In all cases I try to have my stop to not cause more than about a 4% loss. I think the worst method is a set percentage loss. I say 4%, but that 4% very closely coincides with a nearby break of support, so entry points are always key for me. Two good examples are SIRF and BCRX. My initial stop for SIRF was tad below 50sma, or 27.70, but since bumped up some, and for BCRX just below recent support of 4.25...4.15 to be exact. Look at charts and easy to follow. Getting kinda wordy, but it's really simple imo...make sure your stops give some breathing room but at same time cut losses to a minimum if triggered. Another point to consider is postition size. Say you buy a volatile stock that regularly swings 10% or more intraday. In that case give more room to jiggle around but buy maybe only half of a full position. FWIW.
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Registered User
Joined: 12/19/2004
Posts: 457
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Just to add to what fpetry said:
I used to put my stops on the books when I entered the trade, but I got whipsawed out of a few trades, so I don't bother doing that anymore.
I'm disciplined with my stops. I will use a mental stop, and enter if it is hit.
I will also base my stop on the close. If, for example, I'm using a specific moving average, I'll look at a line chart with the moving average in question. If it closes below the moving average, I'll exit at the next market open.
Is this risky? Yes. If the stock gaps down, there isn't anything I can do, except to exit at market. But I don't have large amounts of capital tied up in any specific position, and hold significant cash reserves to compensate for this.
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Registered User
Joined: 12/18/2004
Posts: 180
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I agree with rmr about basing your stops off the closing price and not entering your trade on the books, as we have discussed in prior posts. I also usually exit the next day if my stop is hit (depending on the current technical condition of the stock). Support, i.e. moving averages, Bollinger Bands, previous Peaks and Troughs, Candlesticks and other pattern-based support should always be considered first in stop placement. You will find that most pattern based support exists at a level that is within the normal volatility of prices as defined by a certain number of ATRs or Standard Deviations. If not, then I would use the pattern-based support over any of these methods.
Another thing that I find useful is to calculate the absolute value of the change in closing prices over the number of days that you normally hold a position, or 20 days for an indefinite holding period. Then subtract this amount from the previous close. If this stop gets hit (the stock closed below it), assess the situation. If the short-term technical condition of the stocks warrants that you take this stop, then do it as soon as possible. This can sometimes alert you to trouble before your wider stop gets hit! You can also use it as a half-position stop.
If you write yourself some guidelines for exits, and play around a little and see what has worked well in the past, you can develope a good system for exits. Just remember, you don't make the rules by which the market trades-the market makes the rules by which you trade. If a stop placement or technique doesn't make sense, throw it out! Use one that does, or apply the method in a way that it produces a reasonable stop. Record the method you are currently using as well as any changes in the stop placement as they occur.
As far as lowering your stop, I believe that you should generally refrain from this. However, in certain occasions, it may actually be necessary, if it is determined that a better position stop existed at a lower price than previously determined stop placement.
My opinion is that it is meaningless to make "rules" by which the market "must" trade for setting these stops, or for that matter, any other techniques applied to trading, contrary to the opinions of the pros and gurus who tout these techniques and their applied "strict trading rules" which you "must" follow! Further examination reveals that many of their "rules", from the initial stop placement to their handling of the stop placement as the trade progresses, are not reasonably within the normal trading realm of the stock.
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Registered User
Joined: 12/18/2004
Posts: 180
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Another thing to consider is time stops. If you make some guidelines for time stops as part of an exit system, they can actually be plotted on your charts, or built in to other custom trailing stop indicators. One example would be the PCF:
(0-1)*(MAXCP=MAXC(P*2))*(MAXCP-(formula))
A more sophisticated example that encompasses more than one time frame would be:
(0-1)*((MAXCP=MAXC(P*2))+((MAXCP<MAXC(P*2))+(MAXC(P*.5)=MAXCP)))*(MAXCP-(formula))
Or use it by itself!
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Registered User
Joined: 10/7/2004
Posts: 2
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Avoid % stops especially in thinly traded stocks. I have had one very negative experience with this in which she stop loss was initiated at the low for the day at what appeared to be a sudden big drop and the rise.
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Registered User
Joined: 12/18/2004
Posts: 180
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Some more food for thought about stop placement.
Some methods dynamically adjust the stop price, and these methods can actually lower (raise) the stop at times. I believe this may be o.k., provided that:
1. The stop is never lowered below (raised above) the initially determined placement, even if it tries to go lower (higher), because from this, many folks determine their Risk and Position Size.
2. Once the stop moves above (below) the entry price, never lower the stop below (raise the stop above) breakeven.
???
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Registered User
Joined: 11/29/2005
Posts: 11
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I've been working with a stop based on a range (the absolute value of high and low) and adding a volatility factor. If the price moves by X times (choose your own X) the normal range of the stock then you get out. In addition to that, I always move the exit -- with the same formula -- when the price moves in my favor (so I recalculate the stop everyday). I never lower my stop.
My experience with this stop has been that I'm getting whipsawed a bit. Partly because the stocks I am choosing are increasing in volatility as they gain in price (they are small to begin with) and partly because my stops are on the books and thus I don't have a chance to react (read the chart) but instead I am just ousted. Another problem that I see with my current stops is that they don't have any real Technical Analysis context. In other words, I should probably see where a volatility stop puts me relative to the MA and/or support lines. A random volatility stop probably is not good by itself.
I think I will continue to use my strategy but make some suggestions outlined here, namely stop putting my stops on the books so I have a chance to react when a stock goes against me. (Just yesterday a stock dropped all the way down to my stop and rebounded with in minutes). I got stopped out of a position that appears to still be a good position but some year end profit taking and jitters stopped me out.
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Registered User
Joined: 12/19/2004
Posts: 457
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Can someone post some examples of trades? I know I had lots of trouble figuring out where to put exits. It is still a challenge at times.
What I've finally decided on are the following:
Stop Losses
1. A time stop. If a directional trade has neither made a specific profit, but has not hit a stop, I'll likely close it out. I usually give about a month for a technical trade, and up to 6 months for a fundamental based idea.
2. Initial stop: an N channel breakout/breakdown based on the close. Depending upon the pattern, I will exit the trade if the stock closes beyond a certain high or low. I no longer put orders on the books.
This stop is used if I'm buying in anticipation of a breakout from a rectangle base, or shorting based on a what I anticipate is a rectangle top.
3. If I'm entering in mid-trend, I'd probably put on a smaller position, and use a wider stop, say a close below the lower 1 SD Bollinger Band.
4. If the market closes above a breakout pont, but volume doesn't confirm, I might hold off on exiting for a day, to see if the signal was a false one. If my stop is the 20 day high, but the stock closes 1% above, but on low volume, I'll wait for the next day of trading to see what happens. If it stays above for a day or 2, I'll exit.
I'm going to do some analysis on using volume to filter out false signals.
Profit exits:
1. A trailing moving average. If I'm in a short term trade, and the trend moves in my favor, I'll initially
use a long exponential moving average (ie 21 day). As I see more divergences, or my opinion changes, I'll shorten the average.
Take a look at my MSFT option trade for an example. I had been long calls on MSFT since May. I had been long calls when MSFT moved up strongly, so I started trailing a moving average.
I started to see divergences on the indicators, and was getting bearish on the market, so I moved the trailing stop up to the 5 day exponential average. Eventually, MSFT closed below it, and I exited at the market open the next day, around Thanksgiving.
As you can see, that was a good move. I got out of MSFT at around 27.80.
2. Profit targets based on Bollinger bands, once I see some divergences on the momentum indicators, I'll put in above market limit orders to get out on strength. If neither my trailing stop, nor the profit target is hit in a certain period of time, I'll move them closer to each other, so over time, my target and trailing exit squeeze the price, causing me to get out, one way or the other.
I described this method in one of the Worden Reports, which was published April 6, 2005.
3. Targets based on Fib projections and retracements. If a fib target is hit, AND I see som confirmation by price (ie. a candle reversal pattern) I'll be out at the market.
You can't use just one method. You need multiple methods to take you out of the market.
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Registered User
Joined: 12/2/2004
Posts: 1,775
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rmr, I'll bite and give details of recent losing trade, KLIC. Bought KLIC on 12/22 at 9.16, with small intial position size of 1/3, with intentions to add next day if price moved to about 9.37 which would best previous day's high. Placed my mental stop at 8.75, and by time I pulled exit trigger I got out at 8.71 yesterday. Now it looks like nothing but congestion noise as the 6 week flag remains intact, but I still have it on my watchlist and may enter again. Maybe I should use the method more often of waiting to see what the close will be before making decision to exit or not. Hard to say because sometimes the price doesn't recover but goes steadily downward all the way into close.
You definitely have done your homework on stop placement strategy, congrats.
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