Setting stops is one of the most difficult areas to learn to do correctly. Too tight and you get stopped out prematurely, too loose and you get hammered with large losses.
In setting stops I let the neartime momentum tell me where to set it. By that I mean I don't really pay attention to support or resistance levels that are too far in the past. 10 or 15 minutes usually. The further you go back in the time, the less relevant information becomes. Market conditions change all the time with new information the deciding factor on where a stock is headed. What happened days, weeks or months ago is irrelevant to momemtum traders. Conversely the current momentum tells me at what price level the stock traded up or down to. Guaging the momo correctly is just as important for exits as well as entries, they definately work together. I don't look at fib or or osillators as such. They are slow to react and thus give you skewed information. Recent price action tells you how traders are thinking NOW. I focus on playing small spread stocks(.01) so that I don't get screwed by the spread.
An example is AIG from this morning, I gave it a .15 stop, so .02 under the previous candle. The momo did the work for me as it quickly moved up and away. never threatening or hanging about. I sold it a couple of candles later taking good profits.
My stops are usually in the .05 - .15 range and that is due to using the momo effectively.
First chart shows entry, 2nd shows exit.
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3 comments:
Making the point of finding a stock that is moving is great. If you find yourself entering in something, then have it hover back and forth between a few points, will you get out of the trade since its hard to see who is in control, or will you still let your stop work for you?
Hi Scott, I've been following the blog for a while... thank you for all the help. Quick question, do you have a certain time based stop as well?
PAV, No I don't have a time based stop, I use the lack of momentum or take profits when it'd be foolish not to.
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