Stop Loss Trading System
Hello, great honest article, and your absolutely correct about putting the time in.
A Kind of Introduction To Day Trading
The proceeds were invested in the risk-free asset T-bills until the end of the month. Not only did the application of the simple stop loss strategy reduce losses it also increased returns. The stop-loss strategy increased the average return of the original momentum strategy from 1.
It also increased the Sharpe ratio measure of risk adjusted return of the stop-loss momentum strategy to 0. The stop-loss momentum strategy also completely avoided the crash risks of the original momentum strategy as the following table clearly shows.
Do you hate a price driven stop-loss system? If you do you are most likely a hard core value investor. Here is something you may want to consider, a fundamental stop loss suggested by a friend and long-term subscriber to the screener. You can read the whole article here: Ever thought of using a fundamental stop-loss?
This has been a rather long article to come to a very clear and simple conclusion: The key to making a stop-loss strategy work is to stick to the plan, not once but over and over and over again.
The difficult part is to not let your emotion keep you from selling when a stop-loss level is reached. This is how you can implement a stop-loss strategy in your portfolio, it is also the strategy we use in the newsletter. What a stop loss strategy also does is gives you a system to sell losing investments and invest the proceeds in your current best idea which may be a large potential winner.
PS Do you hate a price driven stop-loss system? If so here is an idea that will help you limit your losses if the underlying business of your investment starts to go downhill. Come on, admit it. If you have not already done so sign up for our free newsletter includes all the latest research and investment ideas we write about in the block at the bottom right of this page. Performance of stop-loss rules vs.
Lo May 1st, Best 3 strategies we have tested. The sort system of the Screener is priceless. So lets look at an example here just to prove this point. Inside of think or swim you can use the probability of touch functionality and feature. Again you don't need to have this in your broker platform if you're using think or swim, great. If not you can assume because I'm going to prove it here that your probability of touch or your probability of holding a paper loss is two times the probability of being an actual loser or losing on the trade.
So let's go over an example here so we can show you where we're talking about. And again we're working on just the call side right now. And then we also have the probability of touch. So lets go over each of these, so you know exactly what we're looking at. So, stays above that 43 level by expiration again which is 46 days away. Again that's holding every trade in every scenario all the way to expiration you do this type of trade over and over and over again.
Now, most people understand that. That's probably a very simple concept for you now that you're this far into our training here on track number 3 and what most traders end up doing is: I'm going to use a stop loss order to protect myself".
And that's logical, and this is why people do it, and I understand, and I get it. They say "okay, if Oracle starts trading from And the problem with that thinking is what we don't understand, or most traders don't understand that the probability of Oracle just trading up to and touching the 43 strike is almost 2 times the probability of it staying there. Which means that most of the time when it goes up, and it touches or trades at 43 it will back off of that level.
And so you have to understand this concept this difference between the probability of a trade or a stock touching a strike price and the probability of it staying there. Because the probability of touch can often lead you to the stop loss orders that create more losing trades. So if we look at it visually on the chart here you can see again we are looking at that 43 strike if Oracle is trading right about here and it's moving around by the time we did this video.
But you can see it's still trading right around Just touches it one time. If you have a stop-loss order immediately your order gets you out and guarantees a loss. And that's often what we see a lot of times. So like, here back in this expiration cycle here you can see Oracle went up and touched that 43 strike multiple times and ended the expiration cycle down. But there were 3 times where it would have gotten you out on a stop loss order but if you would have held through the trade and let the probabilities work out you would have been a winner.
Lets look at a different example here just to prove again the same concept. If you look at Netflix here at the time we're doing this video Netflix was trading at about So again about that 2 times probability of the Netflix stock touching our strike price at So to say it another way: So when you are holding a paper loss that's hard to do.
And that's hard to do for people. Before then, no way José. Listen, if someone has a really kickass way to make money trading they sell it to a hedge fund or use it themselves. That being said, there are some decent newsletters out there. The James Dines letter being one of them. Experiment with their information. Test their ideas against your method.
People will devise elaborate narratives around their ideas they want you to buy into. They will tell you that you need them. You need a system that works. Incorporate their idea into your system if you believe in it, see if it actually works. Or invest in your own business. To this day I get a warm fuzzy feeling when I see a price chart.
I feel at home and I see patterns and I get the urge to dive in… Maybe I will again. I was on break before going into my junior year of college. I was trading, doing pretty well. I was having a particularly good morning when I received a picture message on my phone. I was freaking amazed. I stared at it for a long time.
This combination ended up with massive losses in the next couple months. He still ended with an awesome five-month return… but you were a millionaire for a month and then not… well, it hurts. I used this method with my balls about a foot off the wall and made great returns. I nearly doubled my personal account in six months and then was able to raise money from investors with that track record.
This method is specifically useful for commodity futures but can be applied more widely with certain modifications. This method required constant awareness of price movements but not a lot of action. I just looked up the Corn Futures price chart at barcharts.
We can zoom in to see if that would have presented us an opportunity. The first is the simplest, this is the first filter I use to sort through charts: You can see this quickly and skip it if the answer is no. If it is then go in for a closer look. I will keep tabs on a bunch of charts sitting at these areas while I wait for the other requirements to be filled. I recommend you read everything at StockCharts. Candlesticks are just another way to view pricing information on a chart.
A red is the opposite, the bottom of the red bar is the closing price. The skinny area is the full area covered by price movement during the period covered by the bar. Keep in mind we want these patterns at a multiyear high or low. Preferably with a gap. The gap shows one last push up. The two candlestick show consolidation of price movements. Check for the third requirement. General Mills buys a metric shitton of wheat.
They move that market big time. It would be nice to know what companies like General Mills are doing so we could be on their side, right?
Now, General Mills and other large producers use futures markets to hedge price fluctuations more often than trading for a profit like us. Companies that trade over a certain amount of contracts are required to report the trades they make. These are collected in reports called Commitment of Trader Reports. You can get these reports here. You can get them in a more useful form a chart here. We can see a great multiyear low which is more obvious in the weekly chart, note that this is a daily and some consolidation.
A setup basically means the boxes for your method are checked off. We want to see the producers make a significant move in the direction of our potential trade. Here I would want to see a large movement toward zero. He put on a huge position and then used all the profits from each movement to make his position even bigger. I played more conservatively and did well.
You need to set a stop-loss immediately after entering your position. I would give different markets different leeway depending on how widely they fluctuated normally. Corn might fluctuate 10 points daily on average while Crude Oil might fluctuate The most important thing is that you set a stop loss with a loss that you can manage. You need to be prepared to take losers. Ideally your stop loss is below the previous low.
You trade seeing more of a movement for taking on less risk. This is the most common scenario. This is the more interesting version—the market moves in our favor! Obviously we would love the market to take off in the direction of our trade and lead us to our fortune. Even when we get a winning trade, we have to work with it. It will go up a while and then back down, then up and then down.
Adding to the position. We talked about this a little earlier. Say you get a strong movement in your favor, then it pulls back a bit to consolidate, you can add to your position to double-down on the move. This is the one you will use most often as in every winning trade. I like to move my stop-loss to my entry price as soon as possible. A support level is a price at which there is resistance to the market moving below.
This is usually created by a small pullback. Continue to adjust your stop losses as the market moves in your favor. Reducing our position taking money off the table. At certain reversal patterns I would exit a trade and not wait for it to hit a stop-loss.
There are a few minor things omitted just for the sake of simplicity… these items decided most of the decisions. Look at a 5 year chart, then if one looks promising look at a 1 year chart, then a 6 month. Go and spend an hour looking at charts right now.
I glossed over a lot of technical stuff on purpose. The goal here was to give you an idea of what it is to be a trader and an example of a method to begin using.
Just put them in the comments below or email me. Thanks for taking the time to read this! Let me know what you think - the good, the bad, the ugly - in the comments below. Kye do you know any broker that can give you startup funds for trading if you want to start but no funding please.
Read your article…alot of good information. I wished I could just give you my money and close my eyes and hope you make some kind of magic when my eyes open. Thanks for taking the time. Sticking to a basic plan that works and not getting emotional is a must. Hi thanks for a well thought trading rules to go by!
Like you said, having a set of rules are important and sticking to them until the end. Keep the fire going. Thanks for your time! Hello, great honest article, and your absolutely correct about putting the time in. I had to disconnect my phone and stay off of social media just so I can put 8 to 10 hours a day studying..
I wanted to ask you if you ever applied a similar method for Forex Trading? No mention of that here or how to avoid them. Probably because there is not and that is why none of you ended up making money in the end. That is why trading on the CME is much better than Forex platforms, those guys are definitely crooks.
I use the COT reports quite often, and it is a helpful tool. Sadly, not a lot of traders take it seriously. It is understandable, not a lot of traders are long-term speculators; everybody loves to day-trade, and for them it is useless. Again, Kudos on the article. I recently recovered my initial investment from a scam broker.
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