Hi bbgold,
Given the move FIRE has had the past couple days, your stop was prudent, IMHO. I should have set my stop on PSIX closer to the gap up.
Due to the extended OT discussion of stops that follows, tonite's scheduled book report of Dave Landry's On Swing Trading will be postponed for another nite. <VBG>
Setting Stops:
William O'Neil: "The whole secret to winning in the stock market is to lose the least amount possible when you're not right."
How to set stops could be a book in itself and often is a chapter in some books. One good discussion is in Van K. Tharp's Trade Your Way to Financial Freedom. Jeff Cooper also spends some time in each of his books on setting stops. So here are some thoughts gleaned from a lot of reading and seasoned with some experience.
First, you must realize that you set a stop to take a loss. It may be a loss from your entry, or a loss from your paper profit, but a loss.
Second if you are using a stop set with a broker, know what happens when it is hit. Does it become a market order (which might take you out a lot lower than you thought) or can you set a stop limit order (which might get traded through and not execute at all)?
Next, some considerations for stops include: how you handle loss (shrug it off, carry a grudge, etc.); how you trade (swing, scalp, position, invest); whether you have the ability (time, data feed, etc.) to monitor the stock intra day or trade from daily charts; whether you have the personality/discipline to execute a mental stop, or are better off with a stop order (limit or market); how the stock trades (in the past, that day, its volume, did it gap, is it approaching resistance, etc.); and a lot I probably haven't thought about off the top of my head.
There are a variety of methods for setting a stop:
- Dollar stops - decide how much you're willing to risk in the trade and set your stop accordingly.
- Volatility stops - to avoid market noise, set to a multiple or standard deviation of the stock's 20 day ATR or set to some standard deviation below a MA (Bollinger Band stop);
- Percent Retracement stops - set stop at a % of the entry price (e.g. 5%); I don't recommend this unless you know the trading of the stock thoroughly, what it's daily trading patterns generally are, and can figure the maximum adverse excursion (MAE); I have used MAE trading with SBUX for several years with great results.
- Support and Resistance stops - self apparent, stop set at the appropriate level below or above entry.
- Trend line, channel, MA, or TA indicator stops - stop set to trigger on a cross of the flavor you choose; may include crosses of 2 MAs or MACD signal or Stochastic, etc.
- Time stops - takes you out of the position if it hasn't made a profit, or a predefined amount of profit, within a certain amount of time. Joe DiNapoli (DiNapoli Levels) advocates using a 3 period time stop; i.e. if you are trading on a ten minute chart, you should be in a profit within 30 minutes or you kill the trade.
- Scalper's stop - for those who watch a L2 screen constantly, when the ask size and/or # of MMs on the ask pile up fast, MMs start dropping the bid, kill the trade.
Again, there are probably other techniques that I've not thought of as I write, but will leave for someone else to elaborate. However I will offer a several other general observations, in no particular precedence.
#1 Avoid setting common stops such as on the break of a whole number (5, 17, etc.) or on a break of ten (20, 30, etc.). Also avoid using yesterday's low, or 5% below yesterday's high, etc. Those that we are contending with and who have the clout (GSCO, NITE, etc.) have long ago figured out the crowd's psychology and when it suits them, will use it to their advantage. Lesson here is to pick a stop that you're comfortable with, but which isn't where everyone else is. If you're in the crowd you'll be part of the landslide when everyone's stop is hit (in my Army days, on patrol this was known as not bunching up so that several people wouldn't get caught by one burst).
#2 Your stop should be based on the trade. There are stops for gap up plays, for blow off tops, for steady trending stocks, for 3 day trades, for bottom bouncers, for Mark's Popper's, etc. Especially for the common setups, watch out for the mechanical "set your stop at yesterday's low" approach as that's where most everyone else's will be.
#3 Your stop should be active. Set a stop when you enter the trade. If your entry was good, you'll be moving the stop up, if not you're out and preserving capital for another trade. Once the stock has moved above your entry, move your stop to at least break even (this saved me today in GMGC). As the trade continues into profit continue to move your stop up (reassess at least daily) and never move it down. Thereafter there are all sorts of variable stops you can use. Oliver Velez (of Pristine Daytrader fame) has taught a percentage stop procedure for years. You can set a close stop for a part of your position and bank some profit on any pullback, but allow a wider stop for the rest. You can have a dollar profit target, or a sell when the stock fails to move thru resistance, or if the position’s rate of change flattens or the profit doesn’t increase after a given period.
Well, that's enough for now. I hope I'm not preaching to the choir, and would appreciate any one else contributing to this monologue. Though different topics, a discussion of risk management or position sizing would also be engaging - any takers?
Peace and Justice --- Patrick |
