Use a Daily Stop-Loss to Protect Your Trading Income

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Locking in Profits – how to use your stop loss to secure gains

On too many occasions, I see clients that are making profit, lose their primary investment without protecting their trades correctly.

This can be due to a number of reasons such as, not being able to monitor the trades for a period of time etc. (clients with eToro’s mobile application don’t have this issue)

Traditionally Investors use a stop loss to protect their initial investment if the market turns against them. Basically, it’s the amount they are prepared to speculate in the markets and therefore associated with a negative number.

There is a simple way to capitalize on your profitable trades without forfeiting any of your primary investment.

When your trade moves into profit significantly, then a percentage of your profits can be “locked in” by moving the stop loss into profit (a positive number).

Take the example below. (The spreads have been omitted, to keep things simple)

  1. Investor opens a Short (sell) position is opened at 1.3433
  2. Take profit is 100 pips = 1.3333
  3. Stop loss is 100 pips = 1.3533
  4. After a period of time the investor moves his stop loss into profit at 1.3383 (8/2/13 @ 17:30)
  5. From this point onward s the investor can’t lose any of his initial investment
  6. He will make a minimum profit of 50 pips at a price 1.3383

A few simple rules to follow:

  1. Make your trend analysis and decide the direction & duration of the trade
  2. Wait for the Investment to move into a significant profit
  3. Decide on the amount to protect
  4. Avoid placing the stop loss too close to the current market price to allow for reasonable retracements in the market.
  5. Don’t double guess yourself and move your stop loss back into a negative number.
  6. If the trend continues in your direction continue to move your stop loss into a bigger positive number (A manual trailing stop)
  7. If the trend continues to move in the correct direction also move your “take profit” out so you lock in further potential profits.

Trading takes time, patience and discipline please don’t hesitate to contact me on the openbook to answer any questions you may have. SteveHu

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How to Use Trading Stop-Loss Orders

When trading, you use a stop-loss order to overcome the unreliability of indicators, as well as your own emotional response to losses. A stop-loss order is an order you give your broker to exit a trade if it goes against you by some amount. For a buyer, the stop-loss order is a sell order. For a seller, it’s a buy order.

Enter your stop-loss order at the same time you enter the position. In fact, you need to know the stop in order to calculate how big a position to take in the first place, if you’re using any risk-management rule.

Technical traders have developed many stop-loss principles. Each concept is either a fixed trading rule or a self-adjusting one. Stops relate to indicators, money, or time, and often these three don’t line up neatly to give you an easy decision. You have to choose the type of stop that works best for you.

The 2 percent stop rule

The 2 percent rule states that you should stop a loss when it reaches 2 percent of starting equity. The 2 percent rule is an example of a money stop, which names the amount of money you’re willing to lose in a single trade.

Risk-reward money stops

The risk-reward ratio puts the amount of expected gain in direct relationship to the amount of expected loss. The higher the risk-reward ratio, the more desirable the trade. Say, for example, that you’re buying Blue Widget stock at $5 and your indicators tell you that the potential gain is $10, which means that the stock could go to $15. You could set your initial stop at $2.50, or 50 percent of your capital stake, for the chance to make $10. That gives you a risk-reward ratio of 10:2.5, or 4:1. (Strangely, the amount of the gain, the reward, is always placed first in the ratio, even though it comes second in the name.)

Maximum adverse excursion

John Sweeney developed the concept of maximum adverse excursion, which is the statistically determined worst-case loss that may occur during the course of your trade. Using this method, you calculate the biggest change in the high-low range over a fixed period (say 30 days) that’s equivalent to your usual holding period. Actually, you need to calculate the maximum range from the entry levels you would’ve used. Because you know your entry rules, you can backtest to find the maximum range that was prevalent at each entry.

Trailing stops

Trailing stops use a dynamic process that follows the price: You raise the stop as the trade makes profits. A trailing stop is set on a money basis — you maintain the loss you can tolerate at a constant dollar amount or percentage basis. You could, for example, say that you want to keep 20 percent of each day’s gain, so every day you’d raise the stop day to include 80 percent of the day’s gain.

This method means calling the broker or reentering the stop electronically every day. The important point is to keep the stop updated to protect gains and guard against losses at the same time.

Indicator-based stops

Indicator-based stops depend on the price action and the indicators you use to capture it. Indicator stops can be either fixed or self-adjusting. Here are some important ones:

Last-three-days rule: The most basic of stop-loss rules is to exit the position if the price surpasses the lowest low (or highest high if you’re going short) of the preceding three days.

Pattern stops: Pattern stops relate directly to market sentiment and. For example, the break of a support or resistance line is a powerful stop level, chiefly because so many other traders are drawing the same lines.

Moving-average stop: You can also use a separate indicator that isn’t part of your buy/sell repertoire to set a stop, such as a moving average.

Volatility stops are the most complex of the indicator-based, self-adjusting stops to figure out and to apply, but they’re also the most in tune with market action:

Parabolic stop-and-reverse model: Create an indicator that rises by a factor of the average true range while new highs are being recorded so that the indicator accelerates as ever-higher highs are met and decelerates as less-high highs come in. In an uptrend, the indicator is plotted just below the price line. It diverges from the price line in a hot rally, and converges to the price line as the rally loses speed.

Average true-range stop: This stop is set just beyond the maximum normal range limits. You take the average daily high-low range of the price bars, adjusted for gaps, and expand it by adding on a constant, like 25 percent of the range.

Chandelier exit: This stop solves the entry-level issue. Invented by Chuck LeBeau, the chandelier exit sets the stop at a level below the highest high or the highest close since your entry. You set the level as a function of the average true range. The logic is that you’re willing to lose only one range worth (or two or three) from the best price that occurred since you put on the trade.

Time stops

Time stops acknowledge that money tied up in a trade that’s going nowhere can be put to better use in a different trade. Say you’re holding a position that starts going sideways. It is reasonable to exit the trade and find a different security that is moving.

How To Use Stop-Losses To Improve Your Trading

Posted by thomas | Aug 24, 2020 | Finance | 0 |

In my column this week I would like to discuss ways to begin trading. But to start, let’s first define what trading is. It is any type of transaction where the duration is usually less than 3 years. This a definition that the South African Revenue Services uses, and I agree.

It does not always include the geared products like FX (foreign exchange), CFDs (contracts for difference) or futures (see the sidebar). It is more about the duration of how long a position is held and when it comes to the three-year rule it means that many people that think of them themselves as investors are actually traders, because they are holding for under three years.

One of the first things that a new person to trading has to understand has to do with you will not make money fast. There are many things you first need to learn and understand, and similar to any other type of skill, it takes time and patience to master. In general, my advice will be to new traders that they probably won’t make money within the first year and maybe even two, and to rather set goals of breaking even in this period. The protection of your capital at this point is important, because if you lose it, you will have start over again.

How To Use A Stop-Loss

It becomes easier to protect your capital when you use a simple tool known as: the rigid stop-loss. This will be the predetermined level where you have accepted that a trade is no longer working. As soon as a stock has reached this stage, you exit your position without hesitating. The issue with stop-loss is that in many cases the traders ignore this important rule because they are too afraid to take a loss or to admit they have made a mistake. Yet this is the wrong way to deal with trading. Any of the trades that you do enter are merely about probabilities and even the successful traders are often wrong at least 50% of the time. But when your trades that are profitable are bringing in more money compared to the ones that are losing money, you are winning.

To take it one step further, it is unwise to use loss or profit on any of the individual trades as a metric for your overall success. Even when you are doing everything right, the trade might be one out of those 50% that results in loss. To explain it further, you may be doing everything right, but you are stopped out over a loss. How are you able to decide when a trade is not good, after you have obeyed all the rules?

A far better way to measure our success as traders is to make a decision on what the perfect trades look like followed by trying to execute more perfect trades according to Ultimate Stock Alerts. The list on what will make perfect trades does not include loss or profit, but would rather include the questions like: Was the size position right? Was I able to wait for the confirmation? Did I have my exit-strategy ready before entering the trade? Did I stick to my exit-strategy? I personally use a list that contains 7 points and my overall aim is pretty simple: to achieve 7/7 for every trade.

One of the other essential aspects about a stop-loss, is where you have placed it. In most cases, traders are placing it way too close to an entry. An example of this is 3% away from an entry on the stock, which has a daily move average of just about 2%, and the true range average of close to 5%. These values are telling you that a 3% stop-loss will hit almost even as the share starts to move towards your direction, in association to the duration of this trade. In this case you would need to lower the trade size and then move your stock-loss to about 8%, from the entry, which will offer you with additional wiggle room.

Smaller trades is an important point to start at for the newbies. You may feel tempted to use your entire capital on one trade because you feel confident about your decision. As I mentioned before trading has to do with probabilities and any of the trades can be losing or profiting. You have to ensure that you are able to survive from the losing trades.

Stop Loss Strategies to Protect Your Forex Portfolio

Stop Loss Strategies to Protect Your Forex Portfolio

Trading is a game where the best form of attack is to defend. Your first line of attack is to make sure you can trade another day. That means you must defend your portfolio first before seeking huge profits. The only way of defending your portfolio is to have a stop loss strategy you are comfortable with. There are several ways of setting a stop loss. Here are some of them.

Percentage of account

You can choose a percentage of your trading capital you can comfortably risk in each trade without losing your cool. Then calculate the dollar amount. With this dollar amount, you can calculate how many pips your stop loss can be for whichever lot size you wish to trade. For example, if you have a $5000 capital and wish to risk 1 percent of it per trade, that means you’re going to use $50 per trade. At $1 per pip for 0.1 lot, you will have a 50 pips stop loss if you trade 0.1 lot or 25 pips stop loss if you trade 0.2 lot.

Market structure-based stop loss

Most traders prefer setting their stop loss based on the structure they can see in the market. This means setting it beyond important levels in the market such as previous swings high/low or beyond the tools they used for analysis such as moving averages and trend lines. This surely makes sense because it is based on what the chart says. There are several ways you can set your stop loss from what you can see on the chart. Here are some of them

  • A Few Pips Beyond important support and resistance levels: Since price finds it hard pushing through these levels, setting your stop loss some pips beyond them makes sense. Should price finally break out of the level, you would know that it really means business and no point messing around with it.
  • A few Pips Beyond Fibonacci levels: Some Fibonacci levels like 38, 50, 61, 76, 100, and their extensions can be good levels beyond which you can set your stop loss order. Price struggles with these levels too.
  • A few pips Beyond the Main Trendline: You can set your stop loss a few pips beyond the trendline at the point of entry. Trend lines are also great for trailing your profits when you’re in one as they act as dynamic support/resistance levels. You keep moving the stop a few pips beyond the corresponding part of the trend line.
  • A few pips beyond price swing highs/lows: One of the traditional ways to place stops is placing them some pips beyond the high/low of the current or preceding price swing.
  • A few pips beyond a major moving average: An important moving average such as 200-period moving average acts as a dynamic support/resistance just like the trendline. Stop loss can be placed beyond the part of the moving average line that corresponds to the current price.

Volatility-based stop loss

Another good method of placing stops which most big financial institutions use is the volatility-based methods. These methods take into consideration, the recent volatility in the market. Some of the indicators they use to track the market’s volatility include the average true range, Bollinger bands, and standard deviation.

Average true range (ATR): This measures the average price range per unit period over a selected number of periods. There are many ATR-based stop loss indicators out there that follow price movement in a stepwise manner. You can get one and place on your chart to guide you in placing stop loss orders.

Bollinger band: This also measure volatility. Though not a common practice, some traders feel comfortable placing their stop-loss orders some pips beyond the upper or lower Bollinger band as the case may be.

Standard deviation: Placing stop-loss orders beyond the two standard deviation of the average price is not an uncommon practice among traders. You can get a standard deviation indicator or use the standard deviation channel in your MT4 as a guide.

Time-based stop loss

Have you been in a trade and after several hours or days — as the trading style may be — the price hasn’t gone anywhere or, it may even form an opposite setup and starts moving against you? I bet that even though the price hasn’t gotten to your stop loss level yet, you may wish to get out of the trade then than take a full loss. Just as the name suggests, time-based stop loss is setting a time to exit a trade if it hasn’t become reasonably profitable for you to set your stop at the breakeven point. It is a strategy you may want to combine with your other stop-loss method for a better trade management plan.

Setting stop loss is essential for your trading longevity. We will lose money in some trades but we always want to limit our trading losses to a controllable level. Protecting your account is your number one goal in trading. There are many stop-loss strategies you can employ to do that. Remember, if your account is alive, you will see more opportunities to trade; the more opportunities you trade, the more chances of success and the more chances of success comes more chances of losses too. Stop loss strategy is just as important as your trading strategy.

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