How Do I Set Stop Levels? (2)

BarroMetrics Views: How Do I Set Stop Levels? (2)

Ranadagger asked: “could u please also guide as to when do u put ur stop to breakeven and how do u start trailing the same. how much of paper profits do u protect, when do u decide to take partial profits and when do u take complete profits and run.”

I could write a book on the excellent questions you have posed. Let me try to answer them as succinctly as possible.

Firstly, the answers to the questions are founded on my trading philosophy:

  1. The key principle is the protection of capital through
  2. Consistent execution of my trading strategy and risk management rules. Once that is achieved
  3. Pursuit of superior returns.

I implement the philiosophy from the initial stop. Yesterday I introduced the idea of technical stops with filters. This tool is augmented with:

  • The stats derived from Maximum Adverse Excursion studies
  • The stats derived from the Expectancy Return data and
  • The Rule of 3.

I’ll look at Maximum Adverse Excursion today and the rest in subsequent blogs.

I took the idea of MAE from John Sweeeney but I apply differently.¬† From memory (I read the book eons ago), John uses the maximum loss. I don’t like since the maximum loss since it may represent a Black Swan event. Instead I use mean and standard deviation.

The idea is a simple one. What we want to know is: what is likely maximum loss I have to endure before the trade subsequently  proves to be a winner?

But rather than define the Maximum Loss in terms of a single loss, I define Maximum Loss as “mean +2 standard deviations” (i.e a theorectical probablility of a 95% occurrence).

This means I need to keep the necessary stats to produce the numbers. But I believe it worthwhile. The stats allow me to finess my stop levels:

  1. If the technical stop is too close, I increase the stop to just beyond the MAE.
  2. If the technical stop is much farther than the MAE, as soon as possible, I look for an opportunity to move my stops to just outside the MAE.

More on this next week……

5 thoughts on “How Do I Set Stop Levels? (2)”

  1. Thanks a lot Ray for taking up my question and clarifying my query in such detail. You are a great teacher and a great mentor. Thanks a lot

  2. Hi Ray,The other week when i mentioned death zone and gann 50% rule. I think you said if you have time,you may explain your 100% rule. Is this in the book? Also may i ask,if in a future blog can we get back to basics and discuss Barros Swings. Pros & cons and calculation. I didnt realise that there was a companion video for the book.Is in DVD format? I would like to buy a copy if available. cheers Baz

  3. Hi Baz

    Happy Easter.

    * The 100% rule is not in the book.

    * There was a Barros Swing video but I don’t know if we have any copies left. I’ll email you with the news.

    * The calculation to Barros Swings is among the ‘free stuff’ here and on my site.

    * I’ll leave the discussion of Barros Swings to my new book. I am re-writing NOT.

  4. Ok Ray, I look forward to the new book. The video in the free stuff,i find it a bit awkward and cumbersome to understand. Sorry,its probably just me. As you probably know i love researching the Death Zone but also Trend turning points using basic principles behind indicators. Not the actual indicator.Now maybe you can understand my fascination with your stats and analysis. Your knowledge base simply amazes me. I think its brilliant. Happy Easter How they turned a cruxcifiction into chocolate rabbit eggs has got to be a marketing genius. Cheers Best wishes Baz

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