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Hi,
Many traders who trade persistence of market direction (trend followers,
momentum players...) use stop-loss orders to attempt to limit losses.
These stop-losses can be resting orders in the market or in the mind of the
trader.
There are as many stop-loss strategies as there are traders.
Initial stop-loss positions are not the subject of this email. Rather
trailing stop-losses, attempting to lock in running profits are considered
here.
The task can be summed up as balancing getting out too early and losing too
much profit potential and giving up too much of the existing running profit
if the market has turned.
Based on the experience of traders coached, the two of the most successful
techniques for trailing stop-losses appear to include:
- percentage of move,
- trend-reflection.
Percentage of move is a strategy of using variable sized gap between the
current price and where the stop-loss is placed. It is based on the idea
that the size of retracements is normally proportional to the size of the move.
This said, where do you start counting the start of the move that might be
retraced? It is probably either an art, or by experiment, a balance as
always.
Trend-reflection is based on concepts apparently sold by James Sloman to
Welles Wilder and published in the latters "The Adam Theory of Markets, or
What Matters is Profit".
In summary it assumes that the future is a reflection of the past. The
idea is that the technique can give a good indication of where a future
retracement might terminate and so where a trailing stop-loss might be best
placed. Whether the technique has merit or not, selecting trailing
stop-loss points is probably an art or by experiment a balance as always.
Question:
Are these techniques better that others or are the traders who select them
just better traders than others. I do not know the answer, but they seem
to be both used with varying success on many categories of markets.
What technique(s) do you use, and why, with what results based on how many
instances on what types of markets?
How do you balance the benefits and costs of trailing stop-loss placement?
What types of stop-loss order do you use, and why, and with what results
based on how many instances?
Unconditional regards, Ric.
www.traderscalm.com
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