RE; Utilizing stop loss orders to capture gains from stock market Price fluctuations

Many traders know that they need to place stops, and if they don’t know they will likely learn very quickly. Market movements can be unpredictable and the stop is one of the few mannerisms that traders have to prevent one single trade from ruining their careers.

When traders begin to learn to trade, one of the primary goals is often to find the best possible trading system for entering positions. After all, if the trading system is good enough, all the other factors like risk management, or trade management – well, they can take care of themselves, right?

After all, if our trades are moving in our direction and we are making money, all of these other factors might seem unimportant: All we have to do is find that system that works at least the majority of the time, and then most traders figure they can figure everything else out as they go along.

Introducing Technical Analysis 101 by DayTradersGroup.com

 

 

Unfortunately, the truth is that all of the above assumptions are hogwash. There is no system that will always win a majority of the time, and without trade, risk, and money management – most new traders will be unable to reach their goals until they make some radical changes to their approach.

This is a wall that many traders will hit, and a realization that will become part of most of their realities. Because likely, none of us will ever walk on water, or have a crystal ball  that we can display super-human capabilities of predicting trend directions in the Stock market.

Instead, we have to practice risk management; so that when a trade moves against us, losses can be mitigated. And when we are right, profits can be maximized. Once again, most traders that will find success in this business are going to come to this realization before they can adequately address their goals.

Realizing that risk management must be practiced is one thing, but doing it is an entire different matter. That’s what this article is about, investigating the importance of using stops and then further, some various ways of doing so

Why are stops so important?

Stops are critical for a multitude of reasons but it can really be boiled down to one simplistic cause: You will never be able to tell the future. Regardless of how strong the setup might be, or how much information might be pointing in the same direction – future prices are unknown to the market, and each & every trade is a risk. Automating stops is a must and if you are not setting automated stops 2 minutes after you buy you have no business trading, after we buy we do two things, we automate our stops and our selling points, and if we are unsure of the targets we set up trailing stops and if you need to know more try our online trading academy  as it will likey save & make you thousands of dollars.

Researching Traits of Successful Traders this was a key finding – and we saw that traders actually do win in many trades the majority of the time especially following trade alerts by seasoned veterans such as Daytradersgroup.com, Reviews by customers found on stocktwits showed an overwhelming percentage was winning almost 80% of the time
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So traders were successfully winning more than 80% of the time in most of the options trades, but their money management was often SO BAD that they were still losing money on balance. In many cases, taking 2 times the loss on their losing positions than the amount they gain on winning positions. This type of money management can be damaging to traders: necessitating winning percentages of 70% or greater merely to have a chance at breaking even.

Why do Many Traders Lose Money, Researchers explain that traders can look to address this problem simply by looking for a profit target AT LEAST as far away as the stop-loss. So if a trader opens a position with a 50 cent stop, look for 50 cents as a minimum profit target. This way, if a trader wins more than half the time, they stand a good chance at being profitable. If the trader is able to win 51% of their trades, they could potentially begin to generate a net profit – a strong step towards most traders’ goals.

But now that we know that stops are critical, how can traders go about setting them?

Setting Static Stops

As pro Traders we have learned that we can set stops at a static price with the anticipation of allocating the stop-loss, and not moving or changing the stop until the trade either hits the stop or limit price. The ease of this stop mechanism is its simplicity, and the ability for traders to ensure that they are looking for a minimum 1-to-1 risk-to-reward ratio.

For example, let’s consider a swing-trader in California that is initiating positions during the Asian session; with the anticipation that volatility during the European or US sessions would be affecting their trades the most.

This trader wants to give their trades enough room to work, without giving up too much equity in the event that they are wrong, so they set a static stop of 50 CENTS on every position that they trigger. They want to set a profit target at least as large as the stop distance, so every limit order is set for a minimum of 50 cents. If the trader wanted to set a 1- to-2 risk-to-reward ratio on every entry, they can simply set a static stop at 50 cents, and a static limit at 100 cents for every trade that they initiate.

Static Stops based on Indicators

As professional traders and computer wiz boss we have learned to take static stops a step further, We they base the static stop distance on an indicator such as Average True Range, Stochastics, Relateive strength, MACD, and our very own ZCAD. The primary benefit behind this is that we are using actual market information to assist in setting that stop.

So, if a trader is setting a static 50 cent stop with a static 100 cent limit as in the previous example – what does that 50 cent stop mean in a volatile market, and what does that 50 cent stop mean in a quiet market?

If the market is quiet, 50 cents can be a large move and if the market is volatile, those same 50 cents can be looked at as a small move. Using an indicator like average true range, or pivot points, or price swings can allow traders to use recent market information in an effort to more accurately analyze their risk management options.

Trailing Stops

Using static stops can bring a vast improvement to new trader’s approaches, but as disciplined traders & software engineers we have taken the concept of stops a step further in an effort to further focus on maximizing our own money management.

Computerized Trailing stops are stops that will be adjusted as the trade moves in the trader’s favor, in an attempt to further mitigate the downside risk of being incorrect in a trade. You can do this manually if you only have a few trades going but it gets exhausting.

Let’s say, for instance, that a trader took a long position on EURUSD at 1.3100, with a 50 pip stop at 1.3050 and a 100 pip limit at 1.3200. If the trade moves up to 1.31500, the trader may look at adjusting their stop up to 1.3100 from the initial stop value of 1.3050.

This does a few things for the trader: It moves the stop to their entry price, also known as ‘break-even’ so that if EURUSD reverses and moves against the trader, at least they won’ t be faced with a loss as the stop is set to their initial entry price. This break-even stop allows them to remove their initial risk in the trade, and now they can look to place that risk in another trade opportunity, or simply keep that risk amount off the table and enjoy a protected position in their long EURUSD trade.

Break-even stops can assist traders in removing their initial risk from the trade

Manually Trailing Stops

For traders that want the utmost of control, stops can be moved manually by the trader as the position moves in their favor. This is a personal favorite of mine, as price action is a heavy allocation of my approach, and many of my strategies focus on trends or fast moving markets.

 

If your unfamiliar with algorithmic stops and wish to set manual stops a general rule of thumb is to set your stops to sell the security at market should the price fall 1% below the previous days lows, (this method requires you to reset these stops each day)

When the trading day starts I wait 45 minutes and then put a line at the high of the day and a line at the low of the day (horizontal line) those are called range bars and leave them there...as the stock moves up place an order with your broker to sell if it goes 10 cents or so below the lower range bar, or above the top range bar if you are shorting, (shorts are for pros)  (above or below a 24 hour low or high is your stop trigger) - each day put your new range bars up and leave the old ones until it gets too cluttered - price will respect those levels and that my friend is how you set your stops to sell at market automatically if it breaches those levels. When we take a long position if the position doesn't go green right away we exit and then get back in when it gets back above our exit point, We usually wait 10 minutes or so to see if it can hold that level, also if we are in a profitable position and that stock happens to dip more than 1% below the last 24 hours lows we exit.

Trading Trends by Trailing Stops with Price Swings, we walk through this type of trade management. When using price action, traders can focus on the swings made by prices as trends move higher or lower. During up-trends, as prices are making higher-highs, and higher-lows – traders can move their stops higher for long positions as these higher-lows are printed. Once a ‘higher-low’ is broken, the trader will exit the trade under the presumption that the trend that they were trading may be over. Converesly, we will automate a buy to open order (BTO) to trigger should the price move back above our stop point by 1% or even less depending on the security.

During the summer months the bollinger bands will range outside of historical mean reversion as it is a time when many traders losses outweigh their winnings as the months between May thru September that have historically proven to be some of the toughest months to trade due to intense volatility coupled with low volume. Seasoned veterans,

Financial analysts and some of the worlds largest hedge fund managers will employ Professional Wall Street traders to guide them through the toughest season of the year.