Stops and their Use II

BarroMetrics Views: Stops and their Use II

With the interest in the “Stops and their Use”, I thought I’d cover the topic a little more fully.

I believe hard stops (i.e. stops that are in the market) placed are necessary to guard against catastrophic loss. I place my stops at a point beyond which I am not prepared to accept more loss whatever I may think the market is doing.  This stop is partially technical and partially statistical.

  • Technical: I place a stop where if hit, my reason for the trade is invalidated.  I also incorporate Maximum Adverse Excursion.
  • Statistical: The stop needs to be within my money management guidelines. These are governed by my Expectancy Return, the volatility of the market (as measured by the Average True Range [ATR]) and tic value of the instrument. The size of the position is also determined by my assessment of the stage I am in: Flow, Normal or Ebb.

If my technical stop exceeds my guidelines, I pass on the trade.

But stops are not the only way I exit trades. I also use time and structural stops.

By time stops, I mean that for some trades, I set a specific number of days that a trade needs to move mean +1 ATR from entry. The time is set according to the Maximum Adverse Excursion concept (but based on time rather than price) and my assessment of the context.

By structural stops, I mean what the market should not do given the setup (reason)  for the trade. My setups have certain price action that ought not to  occur if I have read the conditions for the trade correctly.

The problem for the novice trader (and he is the person I am trying to reach in my educational activities) is time and structural stops require experience; this experience the novice has not acquired.  So for him,  using subjective exits is tantamount to committing trading suicide.

Tomorrow I’ll address the idea of ‘hedging’. While I would never attempt to dissuade anyone from a behaviour that works for him, ‘hedging’ is a subject on which I have strong views.

4 thoughts on “Stops and their Use II”

  1. my disagreement does not in anyway doubt of your ability to trade, definately not.

    in fact it gives me an opportunity to see if i am wrong myself. i reflex it again and again.

    today my reason may be valid to me but not necessary tomorrow.

    i hope you did not get my idea wrong and i do not hinder your good mission which is to educate others.

    if you are not a good trader, i won’t be here anyway.

    cheers

  2. Hi

    Don’t get me wrong. I am not suggesting you are casting doubts on my trading ability. Nor am I suggesting that your way of trading is not good for you. Whatever works, you should keep. Heaven forbid that I set myself up as the ultimate in trading practices.

    I am saying that the practice of not placing a hard stop is suicide for most novice traders. That’s the point I am seeking to get across.

    And I do enjoy our to and fros.

  3. I think the great thing about this blog is the to and fro of ideas,to stimulate thoughts and ideas. There is always something interesting here,always an idea to research a little deeper. I feel blessed. cheers Baz

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