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Stop Losses & Stop Profits

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SimonSavva View Drop Down
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Joined: 15 Sep 2004
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Post Options Post Options   Quote SimonSavva Quote  Post ReplyReply Direct Link To This Post Topic: Stop Losses & Stop Profits
    Posted: 09 Jan 2005 at 2:39pm

Try Gann or Wormald Geometry.

When I close a position, I always think, "I know its falling now, how far I do not know, but I'm not gonna find out while in position"

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chart rider View Drop Down
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Post Options Post Options   Quote chart rider Quote  Post ReplyReply Direct Link To This Post Posted: 04 Jan 2005 at 8:40pm

Davkell

Yep, know exactly what you mean about difficulty in setting stop losses.  I find it helps to keep in mind a concept from "Trading In The Zone" by Mark Douglas - to trade with absolutely no expectations of the outcome.  This means really to have no expectations and just do what the trade plan dictates -if the stock goes down, the plan provides the exit trigger to protect capital and if the stock goes up the plan provides the exit trigger to protect capital - my own words here but not a typing error, in both cases the strategy is to protect capital.  As a stock rises your capital rises with it, as such any subsequent retracement constitutes a loss of capital.

I have lately been experimenting with backtests that use both a 5% initial stop loss and a sliding stop loss for profit taking.  Thus, once the stock rises by a certain amount, the sliding stop loss kicks in and over-rides the initial SL.  The silding stop loss is based upon the highest close and interestingly I have found 6 to 7% to be the most successful value, which matches your idea of using 7%profit protection strategy.  Backtesting on my watchlist shows this sliding SL to increase returns by a significant amount (around 10% or more).

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davkell View Drop Down
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Post Options Post Options   Quote davkell Quote  Post ReplyReply Direct Link To This Post Posted: 31 Dec 2004 at 2:39am

Thanks for your reply Chart Rider. At this stage, I've been using my intial stop loss (capital protection) as the 26week EMA below my buy price. That seems to work, and at the moment I use the rising EMA as the stop.....ie. sometimes I getted stopped out but lose less than my 2% max of capital! I'm still trying to determine when & how to change this to profit protection. I'm leaning towards 7% below the highest close. Either way, if I stick with the 26week EMA I've noticed a good number of very profitable trades have litterally ridden the 26EMA, ie. they close just below it for several weeks, or have lows just below it, before skyrocketing back on the trend!

It's really hard to choose how to use your stops, especially when you're backtesting. Hindsight is really a pisser! You can see where your stop 'should' have been to either a) save you from that monstrous drop or b) to keep you in the trade for the eventual rise to the moon. It makes it hard to determine how you set your stops, whether capital protection or profit protection so that hopefully on a majority of trades you get the best of both those mentioned outcomes.

All the best in 2005. Thanks for your input.

"Trade Your Way To Financial Freedom."
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chart rider View Drop Down
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Post Options Post Options   Quote chart rider Quote  Post ReplyReply Direct Link To This Post Posted: 28 Dec 2004 at 7:23pm

Hmm, stop losses.....always a challenge to contend with.  The shorter the duration of your trading, the more likely it is that immediate stop loss implementation is the better strategy.  If your trading 1 - 3 day type durations, then a wait to the following day would represent a sizable length of time.

For longer term trading, such as several weeks, I prefer to use a combination of immediate and delayed stop loss triggers.  For example, if entering a trade based upon a straight line trend, then I implement a stop loss if the price closes below the trend line.  If however, just before closing time the price is below the trend line, then I am inclined to exit before the close.  Additionaly, when entering a trade I always place an automatic stop loss at about 5% below the buy price.  One of my rules is that no trade shall exist without an underlying hard stop loss.  One never knows when a stock may plummet, perhaps on a news item or by some large investors getting out.

Another of my trade strageties is based on MA cross overs (10 day & 20 day), in which case a stop loss (or profit take) is triggered by the short term MA falling below the longer term MA. which will trigger an exit to be carried out the next day.  Here too, I always have the automatic stop loss in place.

Through back testing I have found that in most cases an automatic stop loss (in my case about 5%) contributes to increased returns, sometimes considerably more.

My way of thinking is that a stop loss trigger, such as price below a trend line, indicates the stock is not following the intent of the trade strategy and so must be discarded until it re-aligns itself with the strategy.  But, in the more immediate sense, and more importantly, lets say you have selected 1% of your trading capital as the most you are prepared to lose, then an immediate stop loss must be observed if the price falls to that level at any stage, otherwise you stand to lose more than you can afford.  In these situations I like automatic stop losses as if the price falls quickly, I still have a good chance of getting out at the predetermined price.  Also, it deprives me the opportunity to fiddle with my strategy.  Back testing has shown me that stop losses are the difference between positive and negative returns, so when the proverbial hits the fan, I am out straight away.

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davkell View Drop Down
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Post Options Post Options   Quote davkell Quote  Post ReplyReply Direct Link To This Post Posted: 24 Dec 2004 at 10:56pm

Hi all;

I notice there isn't a great deal of trading type questions floating on the forum (yet!), so thought I might drop this one and see the response.

Does anyone have any suggestions as to implementing stop losses and stop profits? I am deliberating as to whether I should sell my stock as soon as the price hits my stop or should I wait for a CLOSE at or below my stop, and sell on the next day's OPEN.

Any suggestions or opinions would be appreciated.

 

"Trade Your Way To Financial Freedom."
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