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Wide stops, Tight stops or No stops?

(Last Updated On: March 5, 2012)

Wide stops, Tight stops or No stops?

Every trader runs into this question at some point. So from your experience what do you think are best?

If anyone interested, my thoughts on this question are at

 

good question and it all comes down to trading style which does take time to develop. We use a number of succesful systems using a range of stops and my colleague Mark Austin uses some very tight stops on FTSE with success.

However I thought a number of readers might be more interested in the more relaxed trading style offered by the “no stop” approach. Just to give a few examples I bought Barlcays at around 100 in March 2009 with no stop. The next day it halved to 50 so not great timing but it quickly bounced back and I bagged a good profit – my “stop” here may be called value + not being over-geared. More recently I bought the VIX EFT in May 2011 with the VIX around 20 – no stop but the VIX rarely goes below 14 although there can be a cost of carry – we had to wait a few months with price going against us but bagged a 100%+ profit in September. Did something similar with the short FTSE ETF (SUK2) and again made money.

Of course it does not always work out and you need to have the cash to buy these instruements but if you don’t want to spend excess time glued to screens this is a good way to go

Stops either physical or mental are very important for trading purposes. Depending from your trading style you might place different types of stop orders. However, placing correct stop orders won’t make you a master trader but it certainly is a component of it. I personally use a lot of stop on close orders to avoid intraday volatility, but this is according to my trading style and may not

 

Most systems will test out better with no stop losses (but with an exit strategy), but they are very hard to trade with any size. No stops are best for the intra-day trader, but also very difficult to follow. You wind up giving it a “little more” room to work, and often times end up taking a bigger loss than you anticipated. Stops manage risk, and respecting risk is what pro traders do.

 

If the “fat finger” incident weren’t enough of a reason to re-consider using “automatic” stops, then the multiple and quite common occurences before and since of what I call “fake-out break—-
The question is sort of meaningless to me. I feel that stops have to be at a logical place, governed by underlying volatility and support / resistance of the instrument concerned. And, “no stops” is never an option for me. And Wide / tight stops does not make sense to me.

I prefer tight stops that reflect the average volatility of the instrument I am trading. I have other indicators that tell me when to get out, my tight trailing stop is really plan B as it can give back too much profit. I also never risk more than 2% of my portfolio on any trade. If I didn’t use tight stops I would be breaking this rule.

This discussion may be more like the difference between a stock trader and an investor. Smart investors are happy when a stock goes down, as if they have done their homework on the value of the company they just get to buy more and reduce their base, however, stock traders don’t always rely on fundamental research, so it’s best to get out at a predetermined level.

 

Thanks. Interesting insights. Look forward to more perspectives. My preference is tight stops initially (often below ATR) and wider stops later once market proves. A big factor I guess is more of psych related than TA i.e., low tolerance level to heat (in time & points) and not trusting

 

My clients and I trade on weekly analytics and we do not use stops. Over 12 years experience with technical analytics-based weekly trading has proven tight stops to be the cause of more missed gains than of losses avoided – intra-week price swings can be sufficient to stop out many positions that by week’s end remain holds. And wide stops on our positions end up being not much different than no stop at all. In instances of a very large price move or gap, 3/4 of these on average go in favor of our existing position, against us 1/4 of the time, and there have been few such moves among our 400 stock watchlist in the past 12 months. If you find daily trading impractical, consider weekly – returns as productive as daily trading are possible. More info at

 

Interesting question — to use or not use stops? Or, the flip side, to use a set “take profit” target? Trading is largely a mental game, and I’ve found that using stops on every single trade allow me to keep my emotions in check. As I look at a potential trade I’ll figure out the amount that I’m comfortable in losing if I am wrong. I will also set –based on support and resistance levels, primarily — where I would expect it hit. If one sets their “risk-to-reward” ratio at 1:3 and i fyou stick to your plan, you can be wrong more times than you right and still make a good profit. If you “do the math” with a 1:3 rr you can be wrong 7 times out of 10 and still make 20%.
Stops need to set based on the time frame you are trading within, the average range that equity moves during that time frame, and your personal loss limits. That way you don’t set ’em too tight and get stopped out all the time.
Personally — and this is just me — I won’t set a trade WITHOUT a stop in place. In realility, that’s all I can control in the trade anyway. I don’t know if it’ll go up or down or sideways, how much it might up or down or why or long it might take to do so. All I can control is how much I

 

The four major factors about using stops are; 1) volatility of the security, 2) time horizon of the trade, 3) support and resistance levels as well as trend lines, 4) if the trade is on the black or red.

1) wider stops if the security is more volatile.

2) Is this a trade or an investment. (Be disciplined, never let a trade turn into an investment. Stay with your original thesis to be in it.) With traders my stops are tighter than with investments, which have a longer time horizon.

3) My stops are set just below support (longs) or above resistance (shorts). Once again, the definition of “just above” or “just below” determinations are also a function of the securities volatility.

4) I usually use closer stops with trades than investments. If this “play” is in the black (profitable, in the money) and you are thinking about taking some profits off the table, place your stops closer. As the old saying goes “he who takes a profit, does not take a loss,” taking some of your position ‘off the table’ with closer stops not only locks in a partial winner, it also lowers your exposure and risk.

 

In general, trend-following systems tend to benefit from tight stops while mean-reversion systems benefit from not using stops.

The reason is actually quite intuitive-if you are a trend-follower, you believe that the price will continue to move on the same direction. So any pullback from that direction tells you that the trend may no longer be there.

If you are a mean-reversion trader, if the trade goes against you, the system will tell you that there is now an even better chance of a rebound.

That being said, there are many ways of controlling risk without using stops, such as smaller

I don’t use stop losses, I trade FTSE 100 and S&P 500 and it works well without stop loss. I found that using a stop is a way of losing money. A large proportion of losing trades will return into a profit (80%) so I just mix shorts and longs and take profits when there is a profit. If there is

 

 

 

“I run the loss until it becomes a profit.” That is very rarely a winning trading strategy… How

 

I don’t have much experience on managing risk without stop losses. From your comment, it appears you might be using some sort of hedging via long & short combo or using time factor to control risk. So I am curious on hear more on how you control and side step risk-of-ruin without stop losses

 

Using stops is a good way of keeping mental freedom, the type of stop being used depends on the type of investment, whether its a momentum or value approach, and its really an art than science. Using stop is part of the risk management process, in case when the market is against you and to get you out of the position when it is a wrong trade. Sticking to a loser will never increase the odd on investment gain.

 

if you think that running losses is not a winning strategy then you are not well informed. Just check your trading account and see how many of your losses (I mean stopped trades) would have turned into a profit had you let them run. I bet you that a large proportion of these losses could be avoided. In my case 80% of trades that would have been stopped out are recovered by just letting them run. Of course I have to hedge to achieve this. If I am long FTSE March, I am short FTSE December. Say I go long FTSE march and the market moves lower, because I don’t have a stop loss, I have to go short FTSE december to hedge but that’s not a problem because I know that 80% of these running losses will become a profit. It’s just a question of waiting. Sometimes I hedge with the S&P 500. I would never recommend this strategy to a beginner, you need to know what you are doing to trade without a stop loss and I can show you how do it if you email me

 

Really good question and lots of good answers. – Stops depend very much on your type of trading strategy and the particular trade you have on. – Your trading strtegy and your trade type preference, will like be an extension of your personality, hence this aspect of your trading will be a reflection on your personal preference. – E.g. Someone who fears high levels of uncertainty will almost certainly not be able to run positions for a long-time and will probably keep fairly tight stops. – Some one who is heavily rule based will have a rigid stop placement, but may allow lots of room dependent on the strategy. – Likewise, is this a multi day or weekly position, then you have to allow for corrections and therefore contra moves, but very short-term positions will have tight stops. etc. etc. – I would always advocate a stop, rather than no stops, but some people have stops inside their heads, these people may have a strategic approach, and do not want to be stopped fully out, but they have to know when enough is enough, this is probably the hardest stop strategy.

 

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