Think Like A Trader Blog

Thursday, 19 April 2018

Stop Losses When Trading - Different Types and Considerations

Reading Time - 5 Minutes

Stops. Every trader needs them, and if you don’t have one in place, you are asking for trouble. The market will eventually reach out from the computer screen and give you a less than friendly slap, and the stinging wont only be in your face, but your trading account. A stop takes you out for an acceptable loss when the trade moves against you and at a point where you have decided that it is best to walk away and lick your proverbial wounds.

But what is in a stop? Every trader knows they should use one, but very few actually consider the type that will suit them.

I am going to cover three in this blog –

- A small fixed number stop
- A stop that adjusts to recent market volatility
- A structure-based stop

Small Fixed Number Stop

This stop tends to be placed above or below the signal candle by a certain number of pips. It will vary depending on the market you are trading and also the timeframe, however for this example we will say you use a 5 pip stop above or below your signal candle.

You use the same stop for every position you take, and the overall stop size comes down to the size of your signal candle. This stop does take into account the market volatility somewhat, since it is based around the signal candle, however it does not give a lot of room for market movements once in the trade.


- Your stop is easy to work out. You can do it quickly before entering a trade. There is no uncertainty, since you know exactly what size the stop will be.

- This type of stop tends to be better for risk reward ratios. The smaller the stop, the less the market must move for you to get to a good level or risk reward.


- Because the stop is relatively tight to the candle, you will suffer a higher portion of losses than say using a structure stop.

- It does not give the market a lot of room for normal price movements before it hits your stop. You will find that on certain trades, you are stopped out and then the market moves to your intended target.

Stop That Adjusts to Recent Market Volatility

This type of stop takes into account recent price movements. It means your stop will expand as the market gains in volatility and reduce as the market quietens down. There are a number of ways to set this stop, however one of the easiest is to use the Average True Range. You simply add the Average True Range to your chart and set it to what you consider a range that will summarise the recent price action – I suggest 5 to 10 periods.

When using the ATR stop, it is also wise to ‘step-up’ timeframes to take the reading. If you are trading on the 1-hour timeframe, a reading of 5 hours isn’t really giving you a good view of what the market has been doing recently. But if you are on the 4-hour timeframe or daily, a 5-period reading takes into account a much larger market sample.

You then decide on your stop level from the reading. It may be 50% ATR, 30% ATR, 75% ATR or any percentage, depending on the type of trading you are doing.


- As we mentioned, this takes into account the recent volatility of the market. This means that your stop will get larger as the market becomes more volatile, and smaller as it quietens down.

- You have a set stop size to use each day. It will also suit each market since the reading is taken off of that market.

- Less losses than a small number stop since it uses the market to determine size.


- It is still an arbitrary number. Why a 30% stop instead of a 50% stop? Why not a 25% stop?

- If the market quietens down and then moves into a sudden period of high activity, your stop will not adjust quickly. Similarly, if the market has been very volatile and then quietens, your stop will still be large in relation to the market movements until the ATR catches up.

Structure Based Stop

I would say that this is the most common type of stop used by beginner traders. It is promoted on most forums and blogs as the only type of stop to use.

With this stop, you place the stop level above or below a recent level of structure, or ‘swing’. The idea being that if you are trading in a downtrend, you want to allow the market to chop around and it is only if it starts breaking above the previous swing-high that you want to exit the trade. If in an uptrend, you only want to be taken out if the market starts to break previous lows (hinting at the end of the downtrend). For reversals, you just pick a recent level of structure and place your stop above or below it.


- You give the market much more room to move whilst in a trade.

- Less losses.

- You are using market structure to determine the stop loss level.


- This stop tends to be a lot larger than the others. Because of this, gaining a good risk reward is harder and requires much larger price movements.

- It is very subjective. One ‘key’ piece of structure to one trader may not be the same to the next trader. Because of this, it can become difficult to determine where to put the stop.

So, there we have three different style of stop. You will notice that they all have benefits and drawbacks. The truth is, with trading, it comes down to the individual trader and their trading plan. I never advise that you just pick a random stop and stick with it. You should test lots of different style stops and also sizes of stops. Let’s say you use a structure stop and need a 1:3 risk reward ratio to become profitable with your trading plan, but your trading plan only produces on average 1:2 risk reward trades using the structure stop. It won’t work and it doesn’t matter how ‘well’ you are trading.

Now let’s say you test your methods again and this time you use a much tighter fixed number stop. You realise that using this stop you suffer more losses, but now you can get lots of trades at 1:4 and 1:5 risk reward. Suddenly your trading becomes profitable.

Most people do not like putting in the work, especially when it comes to testing and refining their trading plan. They settle on something they stumble across and then wonder why they are doing so badly. You MUST be willing to try things that may not at first strike you as beneficial.

Do what others aren’t willing to do so you can achieve what others will never achieve.

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

James Orr

Friday, 13 April 2018

The Battle Inside You - How to Make Good Trading Decisions

Reading Time - 4 Minutes

We’ve all been there, sitting at the computer waiting for that perfect trade. Discipline, we tell ourselves. Patience, we mutter under out breath. We blow the steam from our coffee and smile because we know we are in a good place, ready for this thing called trading, fully prepared this time.

And then that asshole chirps up in your ear. He’s bored. Impatient. Scared of missing out on a trade. He seems to get lounder the longer you wait. Now you’re blowing so hard on your fourth cup of coffee that its splashing over the rim of the cup and dotting across the desk.

What happens next?

A lot of the time, you let the asshole win out. Mistakes happen.

A different scenario?

You’re on a diet. You really want to lose weight. You’re not happy with yourself and all that extra ‘baggage’ you’ve accumulated. But that’s ok, because you’ve thrown out all of the junk food and have bought ninety-seven healthy cookbooks. The Sainsbury’s order is in and the fridge is so green it might be the Hulk you’ve got stuffed in there. Monday goes well. You’re doing it this time. Tuesday is great.

And then on Wednesday you’re tired after work. The asshole chirps up in your ear. Sure, you want to lose weight, but you need a reward. And you’re exhausted. You can get back to the diet tomorrow. Or, better yet, start again next Monday, on a fresh week.

What happens next?

Ding-dong, it’s the Dominos delivery guy.

There’s a constant battle going on inside of us. It becomes even more prominent whenever we need to exercise discipline and restraint. And for a lot of people, they end up listening to the voice that damages them and that seeks short term gratification. It’s like stubbing your toe against a doorframe and then hopping around in agony. But, instead of learning from it, you continue to do it every time you walk through a doorway.

What is going on here? Why are you doing it?

It reminds me of a proverb I read a long time ago. It explained that there is a battle of two wolves inside of us all. One is good and one is bad. At the end it asked, ‘Which one wins? The one you feed’.

There is a lot of truth there. The more you allow the laziness and the self-destructive behaviour to win out, the stronger that wolf becomes. Because that one is being fed, and the other is starving. As time goes on, that wolf becomes dominant and it can become almost impossible to even hear the voice of reason in your head.

Think of it this way – what hand do you use to write? Or what foot do you usually use if you’re kicking a football?

That hand or foot is being used a lot more than the other for the task. You automatically favour it and it becomes good at carrying out the task. Now, if you were to suddenly switch the pen to the other hand, or decide to kick the ball with the other foot, what would happen? Your writing would likely be ineligible and the ball would go through your neighbour’s window.

So, how do you start ‘feeding’ the wolf that you want to be the dominant force in your life? By using it on a daily basis.

You need to set up small daily tasks and routines whereby you make the ‘right’ decision. And it can start off incredibly simple.

Let’s say you want to eat healthier and lose some weight. The mistake most people make is that they dive fully into it and then wonder why in a week or two they give up. Well, the wolf you need to rely on isn’t strong enough. You have spent years feeding the wolf that wants to eat junk.

So, you start slowly. Imagine it like feeding the ‘good’ wolf back to health.

Maybe on Monday, Wednesday and Friday you take a healthy lunch to work. That’s it for two or three weeks. Then on the Tuesday and Thursday you bring in healthy dinners when you get home. A few weeks down the line you add in a weekend walk.

Slowly. Baby steps. Feeding the wolf or muscle or whatever you want to call it back to health. Let it grow to be the dominant force in your head.

If you’re a trader who constantly makes mistakes, don’t sit down at the computer on Monday and think you are suddenly ‘cured’ and can trade impeccably from now on. Set yourself small targets.

A perfect day where you don’t make a mistake and follow your plan. Then the next day you start all over again. If you make a mistake, stop trading. Punish that ‘bad’ wolf and do not allow yourself to trade the day after the mistake.

If you have a perfect week? Reward yourself. Go to the cinema. Go out for a meal. Whatever it may be.

You need to start thinking of the decisions you make as being made by a ‘muscle’. If the stronger muscle is the one that causes you to make poor decisions, then it is going to take time to build up the other side and gain the upper hand.

I hope you all have a great weekend!

James Orr

Sunday, 1 April 2018

Take a Break

Reading Time - 3 Minutes


Hello Traders.

It’s Sunday and I am sitting in a cafĂ© drinking a latte for this blog post. I had my laptop open and was ready to load up the charts and start working through my zone creation process for next month when I decided to instead order another coffee and write this post.

As traders, or as you put your efforts into anything you find you are passionate about, it is very important to find the right ‘balance’ between work and rest. The common belief is that the more you work at something, the faster you will achieve the desired results. Now I agree with that statement, but only up to a certain point.

I learned long ago that if you do nothing but work toward your goal, your actions can have exactly the opposite impact than that which you desired. You can end up burning yourself out and holding yourself back. I see people doing this all the time, filling my email inbox most weeks, mixing up what they are doing and thinking it is simply ‘passion’ that is driving them.

What can make it even worse is that when you get into that approach, with the head down and steaming ahead, smashing obstacles out of the way, is that when the results don’t seem to be coming as fast as you would like, you start to think that you are somehow failing and need to work even harder.

The result is an obsession, a single-minded drive that is in fact very damaging to your efforts. When I really started to turn it around with trading, it was after I forced myself to take an extended break. I was a wreck by then, living and breathing charts. And worse than that, I was miserable and had lost the main reason behind why I wanted to trade – because I enjoyed it. I was turning a real passion into a laborious, horrible experience that I forced myself to power through.

This can infect every aspect of your life. When you get into that mind-set that only ‘more’ will suffice, that you are failing because you aren’t working hard enough, it starts to bubble over into everyday life. Relationships begin to suffer and the whole experience of going through your days can become a chore.

It reminds me of the cartoon memes you often see online, of the person chasing a stack of cash like the donkey chasing the carrot, always just out of reach. They chase it throughout their life, growing steadily older, before at the very end, dropping into a grave.

There needs to be a healthy balance between work and rest. Especially with trading, where there really is a limitless supply of ideas and data you can pour over. Where the insight that can really make the difference can be introspective and so people begin to ‘attack’ meditation and healthy living techniques, trying to wrestle through sheer muscle the desired effects.

It doesn’t work, and that is the truth.

Now, I’m not saying you shouldn’t work hard. This isn’t the blog and I am not the person if you are looking to feed the seed of laziness. Quite the opposite – I am one of those people who believe the saying that when someone calls you lucky, you state, ‘it’s funny, the harder I work, the luckier I seem to get.’

But, there needs to be balance. It shouldn’t consume your entire being. Lift your head and look around. Spend time on the sofa and with the people you care about. Feed the mind with the stuff that makes it tick along. Let it rest. Because it is like any engine out there – if you run it at full speed without any breaks, it will break down. And if it breaks down, it is a lot harder to put it back together again.

When you feel like you’re hitting a brick wall and your head is about ready to crack open, instead of resetting your determination and putting your head down ready for the next charge, try taking a break. I assure you that in most cases, it will do you a lot more good than that extra headlong charge into the brick wall.

I hope you’re all having a great Easter weekend!

James Orr