Personally I think 20% is far too high. A 20% loss means you have to earn 25% just to get back to even.
When you take into the other dimensions of money management - % winners/losers; avg win/avg loss; frequency of trades; size (% of capital) of trades - you are likely to conclude the same. On Teresa's site there is a great spreadsheet tool called the Matrix - intelligentspeculator.com - check it out.
At bare minimum, even blink but faithful stop placing / minimizing losses will at least help a learning trader hold on to capital longer, offering more time for the trader to get the education required to be successful.
But it pays to get educated fast. Conservation of capital is number one, so that we can live to fight another day.
The trader is going to be thinking of more variables than how far away from my entry or price should my stop be... eg
- is the market trending or range bound?
- is the market testing an important top or bottom?
- if in a trade, does it fit what the market is doing? No point in initiating a trend following trade if the market is testing an important top or bottom.
- should the trader be in a/this trade? Not being in a trade is frequently where we should be!
Personally, my stop is not a fixed percentage, its usually one bar away from where I made my entry on a trade. If I have gone long or short on an important test of bottom/top, my stop is going to be below or above the bar that I used as my set up to get in the trade.
There will be times when I am stopped out more frequently, but that's the whole point. If the market proves me wrong, I do not want to be in the trade "hoping" that "I" will soon be "right".
And if I am being stopped out too frequently, then I am trading in too small a time frame for the market in question (or I am reading the tests/failures completely wrong).
Bottom line, I prefer small frequent losses.
An important discussion is how to manage winning trades too... |
