Whenever you buy or sell any market, you have to ask yourself, ‘At what point will the market prove that I’m wrong?’ Once you establish that point, nothing should stop you from closing out when the market hits it. This is the basis for the rule: cut your losses short. Violating this rule is the single biggest reason that people lose large sums of money in the financial markets. It is a curiosity of human nature that no matter how many books talk about this, saying the same thing in different ways, people still keep making the same mistake. — Victor Sperandeo
How long in a position? Depends on the market and the stock. If it is breaking out of a high level pattern I would be in the stock for a shorter period of time. Usually 3-5 days up to two weeks. If the stock had a long base, for example 6-8 to 10 weeks and the market was coming off a nice correction, I might be in it for 10-15 weeks. These things take experience and time before you really get the hang of it. — Dan Zanger (the master)
– Futures: I always have a stop.
– Stocks: Depends. I try not to enter stops into the market. If traveling, I almost always have a stop too close on purpose. I would rather be out than in a pickle.
– Options: Mental stop, or a trigger based on the underlying’s price.
Stop placement: There seems to be instances when 1 support or resistance away from entry is warranted. But lately I am exploring stops at Rick Ackerman’s 2 support or resistances away. And he has another example of 3 resistances away. It seems if price gets on the other side of support or resistance for at least 2 closes, odds are the trend has changed and price will continue in it’s current direction.
I take partial profit (50%) via a very tight stop once a stock swing trade is up more than about 8%, or it seems the trend might change. The stop is positioned close to the most recent intraday reaction. If a momo stock is really strong, the stop will not be hit and I will keep raising it once or twice a day. If it does get hit, great:
– It is now much harder for a potential gain to turn into a loss.
– Many times in these swing stocks, 8% happens in a week. So half the position locks in an 8% profit and reduces risk since I move the mental stop loss to about break even.
– Frequently the rest of the position gets stopped out rather soon at about break even. So overall the position makes maybe 3% in 2-3 weeks rather than a loss.
– More capital is available to put into other opportunities.
After partial profit, a mental stop is placed a bit below the entry price. (It’s very common for price to come right back to the entry price stopping out all the people who have a beak even stop.) If price stays away from this stop for a week or so, a mental stop is trailed under the 34 EMA or a trend line (if it is not too steep).
Dr. Van Thorp’s Trade Your Way to Financial Freedom recommends not taking partial profit: In a way, if the trade is losing money, it is like having a double position losing money. But for me, this seems mitigated by good entries. And the churn herds capital to stocks that are so strong they don’t hit tight stops. Anyway, I did not start making money until I started to take partial profits. That is what works for me.
Christopher Carolan has an excellent post on exits.
Bulkowski’s 12 Selling Tips I don’t agree with number 1 in many cases, especially in relatively thinly traded stocks. But I do agree to have stops and I regularly have many entered in market. If the environment is a raging bull market, I enter stops. If the market is not in a raging bull a lot of shenanigans and down drafts can happen. In those cases it might be better to have stops too close — don’t get stopped out with the crowd.
Basically only stay in IF price action is acting “right”. Otherwise GET OUT.
Dr. Steve Sjuggerud: We asked a statistics firm to test whether or not adding trailing stops to a great stock picker’s picks would help his performance… from 2002 through 2010: using trailing stops at any level between 16% and 34% increased performance… You could do all kinds of other things to plan your exit… a dollar stop, a time stop, an exit based on a technical indicator. The goal of all these is simply to keep you from hurting yourself, to keep you from turning a small loss into a big one… I use the 25% trailing stop because… 1) cut your losers and 2) let your winners run.
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