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stop loss strategy

Discussion in 'Beginners Bootcamp' started by joao, Oct 15, 2008.

  1. joao

    joao Private

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    any ideas on stop loss strategies for wild swings? It seems that unless i place a very large stop loss of 160 or more then my stop loss often gets hit before my take profit order even if the market is going my way.
     
  2. Pharaoh

    Pharaoh Colonel

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    It depends on the pair traded, how active the day is, and how much profit you are aiming for.

    It also depends on if you have a really bad broker that hunts stops.


    Sometimes you set a stop too close and get taken out of a trade just before it goes your way. Other times, you'll set a stop too far away and it will just end up increasing your loss on a bad trade.

    I wish I could give you some hard and fast rules. It depends so much on exact circumstances. A REALLY vague rule (which I will claim full credit for and call "Pharaoh's Rule for Stoploss" if it works and will totally deny responsibility for if it doesn't) would be to see how many minutes in the time frame of the chart you are trading (doesn't work for 1 or 5 minute charts). If you are on 15 minute charts (or shorter) and planning short trades, think 15-20 pips. If you are on 1 hour charts and hope to close in the same day, something around 60 pips may be reasonable. For longer term trades placed off a 4 hour chart, think 240-ish. Obviously, more volatile pairs (like GPBJPY) need more room than slower moving pairs (like EURGBP). Of course, really exotic pairs can have HUGE spreads, so this won't work for them.

    This does make Daily and Weekly charts rather scary - keep in mind how much of your account you are risking - calculate your dollar loss if the trade slams directly into its stoploss. I just watched one of my long term trades go to almost 1000 pips negative yesterday (EEEEK!!!!), but it's turning around now. Yes, there was a stoploss (ALWAYS have a stoploss), but it was another 600 pips away.

    The same goes for profit targets. Set it too close and you miss too much of a big move. Set it too far, and you'll just miss your profit target and the pair will reverse on you. Assuming you are successful with about 50% of your trades, your take profit should be significantly wider than your stoploss. Some people recommend 2:1 or 3:1. Of course, you could set it to 10:1, but you would be very lucky to succeed in 10% of your trades with a risk-reward ratio that high.

    It's never a bad idea if you can take trades were significant support/resistance "protects" your stoploss and where there's no major support/resistance between your entry price and target profit - preferably support/resistance should be a short distance past your profit target.

    Above all, test your theories (or mine) out on demo trades or with VERY tiny amounts of real money.
     
    #2 Pharaoh, Oct 15, 2008
    Last edited: Oct 15, 2008
  3. martin01

    martin01 Banned

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    The Pharaoh is right. I have just begun learning to develop myown stop loss strategy for protecting my trading capital and limiting the losses. stop loss strategy could basically be at the point where I can admit that my initial trade was wrong, and the criteria that made me enter the trade no longer applies.
     
  4. Agent86

    Agent86 Sergeant

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    160 pip stop loss ? WOW

    Hi

    WOW 160 pip stop sounds like a lot to me, but it all depends on what time frames you are trading and what strategy you are using.

    For me I'm trading smaller time frames, mostly on the 5min charts and 15min charts, however even up to 4hr charts I would never even need to risk more then 35 pips to go for anywhere from 70-250 pips. typically greater then 70, but I have a clear entry strategy and clear exit strategy.

    Why do you pick 160 pips stops ? is it just a number ? or is there some reason for 160 ?

    There are soo many strategies, so it's hard to suggest a stop loss for someone because it also depends on the amount of funds they have. But a typical rule for many professional traders is not to risk more then 2%-4% of their account on any given trade.

    Thats one way to look at it, then another is if some do not have the proper equity to only risk 2%-4% such as many mini traders just getting started then it's important to have a good ratio of risk/reward such as risk 1:4 that way you can be wrong 75% of the time and still could make money.

    But others don't use stop losses as they trade indicators which tells them entry and exit points and in this case your stop would be just a super safety net.

    Depending on your strategy this could help define your stop loss strategy. Some put the stop at the previous support/resistance levels.

    Anyhow I hope this helps.
     
  5. Pharaoh

    Pharaoh Colonel

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    It depends on the pair and the target. If I'm only going for 60 or 70 pips, then 160 pips is too big of a stoploss unless I've got a strategy with a very high success rate.

    When I use 4 hour charts, it's for trades I plan to hold for at least a few days and am hoping to get several hundred pips out of. Naturally, I have to trade smaller lot sizes on these trades than on a trade with a 15 pip stoploss.
     
  6. joao

    joao Private

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    I trade with dbfx. When i tried a stop loss of 50 and 30 pips for a 30 minute time frame on two positions, i suddenly saw my stop loss get eaten up like candy. It almost looked like someone was pushing the price up, because as soon as it hit my stop loss it sarted to come down and if i did not have the stop loss i would have made some money. I got paranoid about the dbfx that they were hunting for stops. They denied it, and they could be right. When things go wrong, look for some else to blame. This was during the financial crisis period of wild volatility. Thanks for the advice and ideas.
     
  7. joao

    joao Private

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    First, i am trading eur/usd on dbfx. I decided on 160, because i averaged out the high and low for daily trades, for about 300 days, and i noticed that with high volatility the range tended to be less than 300 pips. The thing about the stop loss is that when i first started, i was doing great with my strategy. I had trailing stop losses, but then one weekend the price of my pair went against me, and by the time the market opened again, it closed my my position way far off from my stop loss and i ended up loosing a bunch. But if i did not have the stop loss, the trade eventually that week came my way, and i would have continued to profit.
     
  8. joao

    joao Private

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    How much did you pay for this manual? When i first started, i fell for one of these sure things, and i just ended up loosing $90.
     
  9. joao

    joao Private

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    This thread has been very interesting. One of the reasons i had such a high stop loss was because my entries had a 70% to 80% chance of success. I traded with the trend, selected relatively small profit amounts for the day. The selection of the stop loss number was based on some averages i had done on the high-low difference for the day which tended to average 200 to 300 pips. So for a daily trade i would do a 160 pip stop loss and a 30 pip profit. If i waited to either close at the end of the 24 hour day, either my profit would be taken on my loss would in general less than 160 pips. I tended to have 7 days of profits and maybe one or two days of losses.
     

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