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Setting Trailing Stops to Capture Gains
April 12, 2013 6.13 AM - New York NY
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
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 so
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 are 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.
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
:
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
Traders 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
Some traders take static stops a step further, and they base the static stop distance on an indicator such as Average True Range. The primary benefit behind this is that traders
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 other traders have taken the concept of stops a step further in an effort to further focus on
maximizing their money management.
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.
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.
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 - each day put your new range bars up and leave the old
ones until it gets to 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
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.
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.
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 so
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 are 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.
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
:
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
Traders 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
Some traders take static stops a step further, and they base the static stop distance on an indicator such as Average True Range. The primary benefit behind this is that traders
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 other traders have taken the concept of stops a step further in an effort to further focus on
maximizing their money management.
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.
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.
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 - each day put your new range bars up and leave the old
ones until it gets to 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
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.
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.
