Stop Losses & Stop Profits

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.

Chart Rider

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).

Chart Rider