Think Like A Trader Blog

Thursday, 17 September 2015

What Type of Stop Should You Use When Trading?

 Reading Time - 4 Minutes

Stops are one of the most important safety nets when you’re trading. A stop sets a maximum loss amount, protecting your account. You should always have a stop when you enter a trade, because there has to be a point when you’re willing to admit that the trade is unsuccessful whilst still protecting your account.

There are many different types of stops that people implement when they’re trading. You get the people who use fixed stops – so, say after they enter a trade, their stop goes five points above the signal candle. Then there are those who use fixed number stops – these people will have a stop of say twenty points for every trade, regardless of the market or situation. You get trailing stops – these stops follow the market, so let’s say the market moves in your favour by ten points, your stop will also move down by ten points and continue to do so after every ten point move in your favour. There’s also the wide stop users – these stops are enormous compared to their trades. So let’s say they are looking for fifty points. There stop might be three hundred points, or an ‘end of day’ stop, whereby they just let the market run until the end of the trading day.

There are lots more types of stops, but those are the most widely used out there.

So, different stops and lot’s of different methods. My advice is to be like the market – dynamic. The market is never the same from one day to the next. It is always changing. Volatility jumps around and you need to be ready for that. Lot’s of people use fixed number stops and fixed stops and are very successful with them, however I like the market to dictate my stop.

What does that mean? Well, you need to think about your stop, just like you think about every part of your trading. Let’s say I use a fixed number stop of twenty points. It works fine on the Ftse 100 and I’m making good progress. Then December comes along and as is the norm, volatility goes through the roof. I go from a steady account builder to wiping out my account very quickly. Or august comes and the markets slow down over the holidays. Suddenly your twenty-point stop seems huge and you’re struggling to make ten points a day.

One stop I would definitely recommend against is the wide stop or end of day stop. They are a recipe for disaster. Sure, I know lots of people say they use them and are very successful and oh hey you don’t know what you’re talking about. It only takes a few bad trades to decimate your account. And even when things are going well, they are useless. So let’s use the example of a three hundred point stop to make fifty points. You average two trades per week on the one hour timeframe. You have seven successful trades and one loser for the month. You have now made fifty points for the month…does that seem worth it? Eight trades to come out on top by one trade?

There are various ways to use dynamic stops and most of them are a personal preference. I definitely rate them as the best. If you want to know more about my stops – about my entire trading plan actually, jump over to:

I hope you’ve all had a great trading week!

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