Had a few comments about losses and stops so I thought I’d roll them into a new post and maybe shed some light on the subject.
It is a very complex issue. Being comprised of many factors which have to be given due consideration and then decisions made on a timely basis. What time is it? When are new candles due to start/finish? What are the markets doing and have previously done today? To what level did a stock reach? Is it pulling back or bouncing? How much volume? What is my gut feeling say to do? to name a few.
First, last and always it comes down to reading the momentum correctly. When you are in the flow and are tuned into the momo your entries become the key to easy trading. Easy trading is when the stock moves rapidly away from entry point in the direction that probability suggested it would. It moves away from your stop. It moves into the zone of profitability. Then you have to switch gears from seeking a good entry and into managing the trade and capturing what the opportunity has presented you. Both are learned skills which are vital to you as a trader.
Needless to say if you trade with emotions instead of a well practiced and thought out plan, you won’t be around for long. Decisions on where to enter, where to exit and take profits or losses, what events will cause you to take profits or losses must be clearly set out in your mind before the trade is made. Grappling with fear and greed during this process will undermind your efforts to be successful. All those related issues must be dealt with during your preparation for the trading day. You must be of one mind only during the day-executing your plan.
So when the time comes to enter a trade, how do I decide where to set a stop? I don’t go by percentages, only where the near time price level has demonstrated its limit. The near time price level goes back no more than ½ hour usually and most of the time only 5 or 10 minutes. If I’m shorting a stock I’m looking for new lows or a pop to get in. If it pops then stalls, I’ll set my stop just above the previous high. My stops are usually in the .10 - .15 range. Sometimes a little less or more depending on the volatility of the stock. The line is blurry and not clear cut, it depends entirely on the action of a particular stock. That's the amount I'm willing to lose to find out if the trade is going to work. NO more.
Currently the market is in more of a sell off mode. But it is not panic in the streets yet so I am not loading up the multiple 1000’s of shares. So I would rather trade normal size – 1000 shares of stocks say $40 and up and 2000 shares of stocks $20 and less. Now here is an important point about greed as it relates to stops – I would rather increase the # of trades per day I do than increase the size of my position. Doing this protects my account from suffering blow out losses yet still provides adequate returns. Doing this protects my decision making process so as not to let dramatic swings due to probabilities not working out affect me psychologically. I have total confidence in my ability to pick good trades and entries but I know that I will not be 100% correct in every decision due to the inherently unpredictable nature of the markets. It may seem a contradiction when you look at my style but I am not in a hurry to make money. I am not greedy. Certainly you have to be quick and know when to GTFO and take profits but that is more of just working at market speed and taking what the markets offer you to take. The big money comes from being right 30 or 40 times a day, or 70 times if the markets are on fire as you churn through the pops, drops and intraday trends. What I am saying is that I don’t need to put myself in a live or die moment by taking on excessive risk on an individual trade. Too much risk chips away at you and soon enough the probabilities will manifest themselves in a most unpleasant way. There are so many opportunities every day so I am not worried that I’ll miss out.
I know I’ve only touched on this whole stops subject but it really comes down to timing your entries in sync with the momentum. Getting in or out of a trade before the masses is the least risky play there is.
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