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  1. #1
    Senior Member kizame's Avatar
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    Default Stop Loss Indicators

    Pheadrus or any other TA,what sort of stop loss do you use?

    I am currently using one that Allan Hull devised,using a channel based on average true range but modified so that the bottom channel line flattens as soon as the price starts moving down,and first close under that line is a sell but; I also use another to compare and still find that they can whip you out of a position early,any ideas would be greatly appreciated.

  2. #2
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    I always use a 'equal risk'-based stoploss system whereby the amount I am prepared to lose on any losing trade is the same for all trades. In the case of my portfolio, the risk I will accept on a losing trade is 0.5% of my total portfolio.

    This assumes that I will exit all losing trades the minute the share price closes at or below my stoploss. Obviously, if the price action on the day dives beneath my stoploss, I will lose more than R (the risk). In practice this does happen.

    Setting correct stops is important when you are trading as obviously you only want to have your stop loss hit when the share price is showing significant signs of weakness. You have to take into account the normal fluctuations of the share price due to market 'noise', hence the stoploss ought to be at a level which is indicative of a price weakness.

    For this reason I always set my stops immediately below a support level, usually observed from previous price action. Sometimes I'll buy if a share price breaks through a previous resistance, and set the stop just below that resistance. Often, former resistance levels can offer future support levels.

    In this way my stops also dictate to a large degree the position size I will take in any trade. The closer the stop to my entry price, the larger the position I will take to meet the 0.5% R requirement.

    For example, I bought AIA last week at 164 when it gave a trendline break buy signal. I set my stop at 159, as I expected some support at 160. (Often support levels are at round numbers; eg VCT is showing good support at 200.) R-value theory shows that if my stop was hit at 159 I would lose 0.5% of my portfolio, dictating that I should take a position in AIA equal to 16.4% of the portfolio's value. ie 0.5% / (164-159 / 164 ) = 16.4%

    In this way I can also quantify my winning trades in terms of R. Ideally you want to have few if any trades losing more than R, while hanging on to your winners so that you accumulate a portfolio which can have several shares showing a return of 10R or more.

    This is what I do and I have found it successful. It is derived from the theories on trading espoused in Van Tharp's excellent book "Trade Your Way to Financial Freedom", which I recommend to all aspiring traders, be they technically or fundamentally based.

  3. #3
    Legend
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    when you know your pain threshold your know where to set your stops.
    bull
    One step ahead of the herd

  4. #4
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    Default

    Kizame, be careful not to confuse "Trailing Stops" with "Stop-losses". Trailing stops are used to lock in profits while stop-losses are designed to limit the loss you make should a stock drop after you have bought. You inquire about "Stop-losses" and Zito's excellent reply addressed that topic, but since you give an example of a trailing stop I suspect that is what you are interested in.

    The simplest and most common method of setting a trailing stop is to use a fixed percentage. For example if a stock has peaked at 100, a 10% trailing stop would be set at 90. Every time prices rise, the trailing stop is raised accordingly. Trailing stops are never lowered. The actual percentage used needs to be varied according to the volatility of the stock in question and your own attitudes. Set it too low and you will give a lot of your profits back to the market when the uptrend ends. Set it too high and you run the very real risk of getting prematurely flicked out of on-going uptrends. It is possible to use back-testing to ascertain the optimum trailing stop percentage for any particular stock.

    Another, slightly better method of setting trailing stops is by basing them on the "Average True Range" (volatility) of the stock in question. Details here :-
    http://www.tradernexus.com/advanceds...ancedstop.html

    While trailing stops might perhaps be regarded by some people as a "stand-alone" trading system, I have never thought of them as such. They are better than nothing, but generally you can expect them to underperform a more comprehensive trend-based system. Take a look at the charts I have posted on ST - almost invariably the trailing stop is the very last to signal an exit. I see trailing stops as a sort of backup - something to get you out of a falling stock in the unlikely event of all your other systems failing to signal an exit.

    Trailing stops are useful if you are the type of person that is quite happy to hold on to stocks that are going sideways in a trading range. Trailing stops usually keep you in such stocks where most any trend indicator will signal an exit.

    Here are some of my thoughts on setting stop-losses:- http://www.sharechat.co.nz/archives/...msg00554.shtml
    The method is essentially the same as that mentioned by Zito.
    Last edited by Phaedrus; 30-07-2009 at 11:32 AM.

  5. #5
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    Hi Phaedrus,

    I just clicked on http://www.sharechat.co.nz/archives/...msg00554.shtml and the web page came up but only with the word "Error".

    Anyway, when you set a stop loss or a trailing stop loss, do you normally sell as soon as it is breached, or wait for a close below this point and then sell. I normally sell at the close below the stop loss, but have found a couple of times that I have lost a lot more this way if the price drops quickly.

    I'm thinking for me at least, it might be better to set it up to close automatically...I'm not too good at sticking to my stop losses. :o

  6. #6
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    WB, the actual link ends :- .../archives/2001/06/msg00554.shtml but this keeps getting abbreviated when posted here. On the original post it still works for me though - but not on your apparently identical copy.

    I don't really use trailing stops and only put them on the charts I post here because a lot of people do utilise them.

    I generally wait until just before the Close before acting on broken Stop-losses. The theory being that I don't want to be flicked out by what might be just an intraday low. It all depends on how actively you want to trade. When short-term trading, I act just as soon as the break occurs.

    Most people find it hard to sell at a loss when they have made a mistake and bought prematurely. Me included. Taking profits by selling feels much better, but you must act counter-intuitively if you are to keep to the universal dictum......

    Cut your losers and let your winners run.

  7. #7
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    Had more losers than winners in the short time I've been in this game...that ratio is starting to improve however.

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