I am sure Matt will chime in here but I wanted to give some
thoughts. Ideally you find some technical reference for a
stop. Maybe it is the previous resistance which is now
support or possibly a Moving Average that has tracked well.
It can also be a case where at first it is the Support (prior
resistance) and then switches as an MA catches up etc.
Otherwise you should define your risk in some manner and have a
condition by which if reached you say that's it and I will come
back to the name later. It has been a while but I use a rule
that I got from William O'Neil (IBD founder) in one of his
books. Look for trades with a 3:1 reward:risk. I
believe his reasoning was then if your right 1/3rd of the time your
a break even trader (it has been a while so maybe it was 3.5:1 or
something but the general gist is correct - if I still have the
book maybe I can loan it out to interested members). So the
rule would say that if the pattern I am playing is calling for $3
upside if reached then my max downside would be $1. Sometimes
you can find a technical level to match that downside risk and
those are my favorites (also a rule I use when scanning for Watch
List ideas).
The negatives? That is more a rule for swing trades and
not day trading. In a volatile market or counter trend trade
any swing trade is going to be difficult to navigate and often you
could see stops hit and then price immediately move back up (or
down depending on if your long or short). Since your coming
from the angle of having profits in the trade it sounds like your
treating it in the appropriate fashion - lock some gains in and
then now just look for a close technical area to use as a
stop. One trick I will sometimes use in a situation where for
whatever reason I have a profitable swing trade but when I look at
the daily I have no clear trailing stop except to just use my entry
point (which likely coincides with the break point) then I may use
that but knowing I really don't want to see it get all the way back
there I will switch to a longer intraday chart like a 1-2 hour and
then once I have a good reference point on that chart I may change
to that price.
Just some thoughts for you to use as you see fit. Hope
that helps!
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Title: sorry, ended up longer
DBA and Agriculture Sector
Posted by tom on 26th of Jun 2012 at 10:33 am
I am sure Matt will chime in here but I wanted to give some thoughts. Ideally you find some technical reference for a stop. Maybe it is the previous resistance which is now support or possibly a Moving Average that has tracked well. It can also be a case where at first it is the Support (prior resistance) and then switches as an MA catches up etc. Otherwise you should define your risk in some manner and have a condition by which if reached you say that's it and I will come back to the name later. It has been a while but I use a rule that I got from William O'Neil (IBD founder) in one of his books. Look for trades with a 3:1 reward:risk. I believe his reasoning was then if your right 1/3rd of the time your a break even trader (it has been a while so maybe it was 3.5:1 or something but the general gist is correct - if I still have the book maybe I can loan it out to interested members). So the rule would say that if the pattern I am playing is calling for $3 upside if reached then my max downside would be $1. Sometimes you can find a technical level to match that downside risk and those are my favorites (also a rule I use when scanning for Watch List ideas).
The negatives? That is more a rule for swing trades and not day trading. In a volatile market or counter trend trade any swing trade is going to be difficult to navigate and often you could see stops hit and then price immediately move back up (or down depending on if your long or short). Since your coming from the angle of having profits in the trade it sounds like your treating it in the appropriate fashion - lock some gains in and then now just look for a close technical area to use as a stop. One trick I will sometimes use in a situation where for whatever reason I have a profitable swing trade but when I look at the daily I have no clear trailing stop except to just use my entry point (which likely coincides with the break point) then I may use that but knowing I really don't want to see it get all the way back there I will switch to a longer intraday chart like a 1-2 hour and then once I have a good reference point on that chart I may change to that price.
Just some thoughts for you to use as you see fit. Hope that helps!