Advanced Stops

To survive and thrive in trading managing risk is critical. The basic component in your risk management plan is the stop loss (how much you are willing to lose on each trade). Before determining the stop method you’ll use, make sure the dollar amount of the loss truly fits your personal risk tolerance. 

There are many types of stop loss methods including:

1. Fixed dollar amount

2. Maximum Adverse Excursion 

3. Volatility

4. Moving Average

5. Time

6. Opposing entry signal

7. Percent Retracement

Just like your choice in style of trading, your stop loss method needs to resonate with your personality. You must trust, even like it. 

Given that markets change in volatility constantly the volatility stop is an excellent choice. This method will adjust the distance from entry to stop based on present time volatility. One simple formula uses a multiple of the Average True Range. This method will tighten the stop when the market is calmer and widen the stop when the market is volatile. Adjusting your position size based on this stop allows you to manage your risk fairly for all market conditions. 

Hint: If this method resonates with you, consider adjusting your profit targets based on volatility as well. It doesn’t make sense to accept a modest profit target when price is moving in wide swings, does it? 

You can also combine stop methods. For example, as price moves rapidly in your direction switching to a tighter stop, maybe a percentage retracement, could capture more of the gain when the move ends. 

How do you know which method to use? Try each one in simulation mode. 

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To your trading success,

Mike Siewruk

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