lbm1 - I can give you an answer but you won't like it. I certainly didn't when I asked the same question many years ago and got an "it depends" kind of answer.
One of the reasons that trading is an art/skill is that it does not always allow for the application of mechanical, hard/fast rules. I think the frustration I perceive in your post is demonstrative of those results? This is a fluid business and one needs to adapt as conditions change.
There is too much information I don't have to be able to make specific recommendations on your positions (entry price, size, % of PF at risk, target, risk tolerance, time frame for trade, tax considerations, etc.) That said, if you're willing to offer one position up as a guinea pig I'd be glad to work through it here - perhaps that could be educational for many here? I suspect we'd get a fair number of good opinions from the good traders here.
But the bottom line is that settings stops falls into the category I call "the way to learn how to make money is to learn how to loose money the right way."
Things that I take into consideration before making a trade are:
1. Always use a hard stop! and EVERY trade has a stop & a target Mental stops are great if one has the discipline to act when they are hit and not get into the rationalization game which leads to holding for greater losses. Been there done that!
I don't mind taking a quantifiable loss when my analysis is wrong, faulty or the market moves against me. I can track and learn from my mistakes and can accept that at times the market is irrational and swings in wild ways. If the trade doesn't play out the way I initially thought, I get out (stopped out) and re-evaluate before going back in. I have found that fighting the tape makes for consistent losses.
2. Set an initial stop at a level that does not allow any one trade to put more than 10% of the portfolio at jeopardy. {some with low risk tolerances might use 8% or 6%) That means that if one's account is $100, then one trade can not risk more than $10 on any one trade! So that means that the initial stop is set at a level where the maximum loss is $10. If the trade requires a risk of $11 - DON'T TAKE THE TRADE! If one limits the amount of a hit they take on anyone trade it saves you from wipe out by one position that swings violently against you. When all heck breaks loose, save yourself - Live to fight another day!
3. Look at a risk/reward ratio for each trade and allow such to drive whether one takes the trade or not. In other words, if the trade has a risk level of $10 but the target would return only $10 if hit, then the risk/reward ratio (R/R) is 1.0. I'm not often willing to put large amounts of cash on the line for such a high R/R. I often look for a R/R of 0.5, lower is a gift (or I'm often being too optimistic with upside projections). Point is that a good entry, with low risk / high reward, has a better chance of preserving capital.
You make money in this business by the slow steady accumulation of profits, not betting on home run swings. Sure if one is lucky and appropriately positioned when a big move happens there is a lot of money that can be made, but those are the needles in the haystack.
4. Once my position moves above my entry, I VERY often move the stop loss up to the break even point. There is an old saying that well heeded, serves one well - Don't let a winning trade turn into a loosing trade.
5. Tighten up your stops once the price approaches your target point. I know, it is human nature to be frustrated that one didn't get the top pivot point high price of a move and "sold early." To that I have two comments:
a. You'll never go broke selling for a profit.
b. Only MB liars and the extremely lucky actually get that top dollar price on a sale. Be happy with the gain you do bag, work to improve results if you think they are low and NEVER benchmark yourself against the MB BS.
6. One of the ways to fight the "woulda, coulda, shouldas" when a stock moves strongly toward your target is to:
Sell a portion of the position (1/4, 1/3 or 1/2) at that original target and let the rest run. If the price gets well above your original target your stop should be AT LEAST the original target. Remember take the profits the market gives and study and learn what you can do to improve results.
Alternatively one could heged the position by selling calls, buying puts or any combo of option strategies. But those are advanced techniques with additional R/R, P/L considerations.
Sorry if this answer is frustrating - it is not as cut and dry as it seems.
Let me know if you wish to work an example.
Hope others chime in with their experiences.
Good luck trading,
H3 |
