Stop Loss - A Surefire Way To Improve
By Trading Secrets
How to calculate a trailing stop loss (part 2)
The method behind this madness is that youre allowing a stock, once its
in profit, a little bit more room to move. Sure youre limiting your risk
at the beginning of the trade by keeping a tighter stop loss; however
youre going to become risk seeking in a profitable situation. That is
to say youll have more risk once youre already in profit.
Personally, I think this is one way of taking a step further than most
people do when adhering to those two cardinal rules of trading. That is
let your profits run and cut your losses short because youre keeping
the losses small but youre letting the profits run by taking on more
risk when youre already in profit.
With this strategy, I also mix and match my stop loss methods. For example,
for one of my trend following systems, I set a two and a half ATR initial
stop loss, and my trailing stop loss is calculated using a completely
different method. I use whats known as the lowest low stop. The way this
stop loss works is I simply find the lowest low in the last X number of
periods. Now, for that trend following system, I actually find the lowest
low in the last 40 days. I then position my stop loss one cent below this
low. Where I find this stop effective, is its almost as though its consulting
the price action itself, and by identifying where the lowest low is. Many
times my stop is set one cent below a support line.
So, when in action, the way this trailing stop loss works is as a new
trading day is added to the chart, one of the old days drop off. I then
find the lowest low in the last 40 days, and reposition my stop at that
point. I find this stop to be fantastically effective and it may be a
stop loss that you look at testing.
Before you go looking for that perfect trailing stop loss, realize that
its very much like the initial stop. There is no perfect stop thats
going to get you out and save you the most profit. Sometimes itll work
for you. Other times it wont. In fact, the real key and the real secret
of having a stop loss and an initial stop in place is that its not how
you calculate it, rather its just having one in place.
You need to find an initial and trailing stop loss that youre comfortable
with. You understand how it works and it makes sense to you. So, how do
you find a stop loss that youre comfortable with? Really simply, you
checked a whole lot of charts of stocks that youve been looking to trade,
marking where you would receive and entry signal, and then marking various
initial stops and trialing stop losses. Progress through the trade, revaluing
your trailing stop loss and seeing which one works the best and makes
most sense to you.
What I find works best at this point in time is to design a system
with simple stop loss concepts. Simplicity seems to work best because
its based upon the understanding rather than optimization. If you
can come up with a generalized, simple concept, that will be able
to be applied across a number of markets in trading instruments.
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