ATR+ (Stop Loss Indicator)
This is a trading tool that I use every single day. I could not live without it for both my live trading and especially my backtesting. It calculates your stop loss size (in pips) based on the current ATR.
How It Works
The first number in blue is the current ATR (pips). The second number in green is your stop loss size for Long trades, and the third number in green is Stop Loss 조정 your take profit size for Long trades. The fourth number in red is your stop loss size for Short trades, and the final number in red is your take profit size for Short trades.
For short trades, the stop loss value is calculated by adding the distance in pips between the most recent swing high’s price and the currently selected candle’s close price. The take profit is calculated by subtracting one ATR from your entry price.
For example – if the ATR is 10 pips, and the current candle-close of EUR/USD is 1.13, with the most recent swing high being 1.1325, and you want to enter short, then your stop loss would be at 1.1335 (a size of 35 pips). With a 2:1R, your take profit size would be 70 pips (at 1.1265).
Your risk to reward profile.
ATR period (how many candles to include Stop Loss 조정 in the calculation).
How Far To Look Back For High/Lows:
Candle lookback period for swing high/lows.
Stop Distance (In Pips Or ATR): This controls your ATR multiplier, or sets your S/L in pips.
Use ATR x ^ for stop loss?: If you uncheck this, then the Stop Distance setting will be treated as pips instead of an ATR multiplier.
The Best Stop Loss
There is always a chance that the stock will reverse direction just Stop Loss 조정 after it has triggered the stop loss, no matter where a stop loss is placed. We wanted to know if the amount of decline allowed by the stop loss affected the probability of a reversal immediately after the Stop Loss 조정 stock is sold. To answer this question, we computed the percentage of incidents (over a period of about 20 years) in which a drop of various specified magnitudes from a recent high was followed quickly by a resumed up-trend, rendering the sale unnecessary. [Note: This particular study focused on percentge-based stop losses for long-term investors. Elsewhere, we report on various sell strategies and other stop loss disciplines.]
For example, we discovered that by changing an automatic stop-loss from 8% (below the high) to 9%, we could reduce by 50% the percentage of unnecessary sales at a loss. Further research revealed that after a drop of slightly over 14%, there was another dramatic drop in the number of “whipsaws.” A drop of this size was significantly less likely to be recovered by the stock in the near future than for all drops of less magnitude. Therefore, a stop-loss of 15% does make a lot of sense. Sometimes, however, stocks do recover. There is absolutely no way for a person who uses stop-losses to avoid selling some stocks just before they resume an up-trend. Regardless of where the stop-loss is set, a post-sale recovery will sometimes happen. At any given moment, an individual can only know what IS (where the stock is at the time of the sale), not where it will be thirty minutes later.
When we decide to keep a declining stock, it is because evidence suggests it is the best thing to do under the circumstances at that moment, not a week later or even 5 minutes later. By definition, hindsight never exists in the present. Therefore, we will sometimes be wrong. If we keep the position and we are wrong, our loss might be 15% on that one position. However, we will probably be right more often than if all stocks are automatically sold under a stop-loss discipline that automatically sells on any decline of less than 15%. That does not mean a stock should always be given latitude to drop 15% before it is sold. The patterns of support and resistance (demand and supply) displayed on a chart of the stock are mitigating conditions. We have found that setting the stop-loss at about 15% for long-term investments generally works well as the maximum decline allowed, but many stocks should be sold long before that. For example, if there is obvious strong support 2% below the current price there is no need to set the stop loss at 15%. On the other hand, an investor could make it a rule that no stock is to be purchased if it is reasonable to set the stop loss any more than 15% below the purchase price.
We analyze support and resistance zones for each stock. When stockdisciplines.com traders buy, they buy with reference to a pre-determined stop-loss that is based on their analysis of supply (resistance) and demand (support) zones. They calculate the stop-loss before they buy, and they buy a stock only if a decline to the calculated stop-loss is tolerable in view of the gain expected. The market does not remember or care where anyone buys a stock. However, it does “remember” past regions of support and resistance. Technicians can see the shapes of these regions in the chart of a stock. Remember that a chart is simply a record of the effect of supply and demand forces on stock behavior. Price and volume movements do tell a story.
If a stock has very strong support 2% below its current price and it declines, breaking through that support, it is not likely to rebound soon, if at all. The same thing is true if a stock has built a good “base,” is bought on a subsequent breakout through overhead resistance with a large increase in volume, and then it breaks down enough to trigger a stop loss set just below support. It is unlikely that we will regret the sale later. The conditions are defined sharply enough for us to render an accurate assessment of where the stock should be sold. Thus, it is not necessary to set the stop loss at 15%. Even if the maximum loss permitted is 15%, the average stop loss would likely be a much lower number. If your average is 8%, then some stop losses will be less than that. The greater flexibility available through support and resistance analysis will yield much better investment results than would be possible if a person rigidly sold all stocks when they were at a loss of 8%. Support and resistance analysis should enable the investor to avoid many “whipsaws” that could not be avoided with a more rigid system. In many cases there would be a profit where a more rigid system would have sold at a loss.
Changing the number of positions your portfolio is designed Stop Loss 조정 to carry could be a means of modifying the foregoing. For example, a twenty position portfolio could allow a stock to drop 20% without it inflicting more than 1% worth of damage on the portfolio. However, allowing more than a 15% decline did not produce any further improvements. In our view, therefore, there is little reason for most investors to expand the number of portfolio positions to more than 15 stocks. What we have said is based on the premise that the investor does not want to allow any position to be capable of damaging the portfolio more than 1% in a worst case scenario. If the investor wants the potential damage due to a single stock to be limited to no more than .5% and wants stop losses set at 15%, then the portfolio should contain 30 stocks.
Our research showed that allowing a 15% decline for the stop loss dramatically reduced the chances that the stock would turn around immediately after it is sold. This information can be a powerful tool that a long-term investor can use to shape his stop loss strategy for maximum effectiveness. It can be used to set the tolerance for the negative impact of any single stock on a portfolio at any level the investor desires. To keep that 15% drop from impacting the portfolio more than 1%, each position cannot represent more than one-fifteenth of the portfolio. From this perspective, then, a 15-position portfolio is optimum for a long-term investor.
All of the foregoing assumes that the investor prefers to use a straight percentage stop loss. He should not. A volatility-adjusted stop loss is far superior. It makes far more sense mathematically and statistically. By nature, volatility-adjusted stop losses are based on the probabilities associated with an individual stock’s volatility. Straight percentages are arbitrary, but volatility measurements based on the action of the stock itself are not. That is the very reason why we have created tools that calculate volatility stop losses. Of course, placing a stop loss just below a recent relative low is the preferred placement. There is support there. If the stock falls through all the buying at that support level, a person has very good reason for selling immediately. Sometimes there is no recent relative low to use as a reference point. In such cases, a volatility based stop loss is next in the line of preference. Straight percentages are the least desirable and are completely unrelated to the dynamics of the stock.
For information about our stop-loss calculator, See Stops
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This site discusses and illustrates “setups” (patterns that often occur just before a surge in price) and stop losses (as well as other sell strategies). The first is very important to timing entry points with big potential in a short time with minimal risk. The stop loss and sell disciplines are important to keeping losses small. There are also numerous free tutorials. Why not stay awhile and look around?
What Is a Stop-Loss Order?
A close look at a stock order type designed to reduce an investor's risk.
Brokerages execute a variety of stock order types for investors to buy and sell stocks. Most of these order types indicate to the broker an investor's preference to purchase or sell a stock at a desired (or better) price. Other order types enable investors to reduce their risk Stop Loss 조정 of losses on trades. A stop-loss order is a type of stock order that enables an investor to limit the potential loss on a stock position by setting a price limit that triggers the stock's trade.
A stop-loss order triggers the sale of a stock (or a purchase for investors buying to cover a short position) once the stock's price reaches a certain value. Investors create stop-loss orders to automatically sell stocks (or cover Stop Loss 조정 short positions) once the stock's price reaches the trigger price set by the stop-loss order.
Stop-loss order example
Investors often use stop-loss orders to limit their losses on new positions. Let's say an investor purchases 100 shares of a hot new tech stock of a company that recently completed its initial public offering (IPO) at $25 per share. To limit the potential loss on this stock purchase, the investor sets a stop-loss order at 20% below the purchase price, which equals $20 per share.
If the price of the red-hot tech stock declines to $20, then that triggers the investor's stop-loss order. The investor's broker proceeds to sell the stock at the Stop Loss 조정 prevailing market price, which may be exactly at the $20 trigger price but can be much lower, depending on the the nature and timing of the stock's price movements.
Advantages of the stop-loss order
Investors use stop-loss orders as part of disciplined strategies to exit stock positions if they don't perform as expected. Stop-loss orders enable investors to make pre-determined decisions to sell, which helps them avoid letting their emotions influence their investment decisions.
Other advantages of a stop-loss order include:
- Brokers don't charge for setting up stop-loss orders (although some still charge commissions on the actual trades), making them essentially a no-cost insurance policy to limit losses on investments.
- Routine use of stop-loss orders helps investors become more disciplined about selling losing stocks.
Disadvantages of the stop-loss order
There are disadvantages to using stop-loss orders. First, establishing a stop-loss order doesn't limit an investor's loss to the difference between the purchase price and the pre-determined sale price. If a company reports disappointing earnings after the market closes, for example, then its share price by the start of the next trading day could be well below an investor's stop-loss price.
Another potential pitfall of stop-loss orders is that they can trigger a stock sale even if the stock's price dips only slightly below the trigger price before quickly recovering. If a stock's price is volatile or another event occurs that causes a brief sell-off by other investors, that can trigger an investor's stop-loss order.
Finally, during sharp market declines, sophisticated investors like hedge fund operators sometimes try to take advantage of the existence of stop-loss orders. Known as "stop hunting," traders short stocks already in decline in order to push prices lower in an attempt to trigger a flood of stop-loss orders. These investors subsequently start buying those same stocks to profit from an expected rebound.
5. Stop Losses
A Stop-Loss is an order which is only placed in the market if price falls to a specified level (if short, the stop is activated if price rises to a specified level). If used correctly, they help to limit the losses on individual trades.
Further details can be found at the links provided.
(a) Stop Losses
Stop-losses should be set as soon as each trade is confirmed. Set the stop-loss one tick below the lowest Low since the signal day.
(b) Maximum Acceptable Loss
Set your Maximum Acceptable Loss on any one trade, as a percentage of the capital committed. Never enter a trade if the stop-loss will exceed this limit.
A long-term investor/trader with reasonable risk diversification may set a limit of 6% while a short-term trader may set a limit of 2%.
(c) Setting Stop Levels
Be technically consistent when Setting Stop Levels. Use support and resistance, highs and lows or other technical levels for your limits.
(d) Adjusting Stop Levels
Using technical levels as in (c), Adjust Stops, over time, in the direction of the trend. This helps to protect your profits without fear of being stopped out before the trend is broken. A long-term investor/trader with reasonable risk diversification may find 6% an acceptable limit. A short-term trader may set a limit of only 2%.
Apart from adjusting stop levels upwards to below successive troughs, the alert trader should watch for chart patterns that may signal significant turning points. This doesn't mean that stops should be adjusted for every minor reversal signal but it is advisable to adjust stops for very strong signals, such as head and shoulders, when confirmed by unusually high volume. When in doubt, take profits by adjusting the stop for only part of your position.
Charles Schwab with 150-day exponential moving average. The trendlines depict the stop levels as they are adjusted over time.
- The trade is entered on October 30th, day . As soon as the trade is confirmed, set Stop Loss 조정 the stop-loss at just below the Low of the signal day [A].
- Price has formed a higher trough. Adjust the stop loss to just below the Low of [B].
- A higher trough is formed. Move the stop Stop Loss 조정 loss to below the Low of [C].
Adjust the stop upwards to below each successive low of the secondary cycle. Each new stop level is indicated by the start (left) of a new trendline. It is sometimes difficult to distinguish between the short cycle and the secondary cycle - weekly charts can be used to eliminate minor fluctuations.
Charles Schwab with 150-day exponential moving average and 20-day volume moving average.
Determining Entry, Target and Stop Loss Prices
The essence of trading is a mix of three steps that any investor has to understand and find his sweet spot on. It is about when to make the first move and deciding on what price to make his investment. The second step is about where to set up his expectation or fixing the point at which to book his profits. Finally, should things not go as per plan, resolving on a price at which he should prevent further losses.
In short, a smart trader’s strategy should be a summation of determining the right entry, target and stop loss prices to optimise on the profits from the trade and also keep any potential losses to the bare minimum.
As an astute trader who wants to get this triangle of entry, target and stop loss prices right, it will help to understand these crucial principles and how they work in the real world of trading.
Determining Entry, Target and Stop Loss prices
This is an investor’s first point of contact with an investment in which he sees some scope for appreciation and returns. The entry price is the numerical equivalent of the amount of trust he places in an acquisition he plans to make.
As it is the threshold of a longer relationship he will have with that investment, the decision of whether he should enter it will be an important one. The responsibility of this decision will have ramifications as this leads to a subsequent one where he has to set the deadline for divesting it.
In the world of investments and trading, the equivalent will be identifying the right time or the price at which you make your investment. As the first step is to find the right asset or the specific instrument to buy, once that is decided, it is about finding the best price at which to acquire it.
At this stage, it is important to let thorough research, technicals and fundamentals to get you to this point. Allowing emotions to sway you can be risky unless you are a seasoned investor or trader and know you can trust your instinct. But it is better to have a proven strategy after studying the market conditions, the industry and the specific item to commit to the optimal entry price.
There are tried and tested methodologies for finding the right entry price. Here is a look at how it works in the real world.
Based on your analysis, identify the levels at which the price begins to move up and the potential for upside it has. This assessment can be based on the outcome from methodologies like support and resistance, demand and supply or techniques like the Fibonacci strategy.
Once the target price has been mapped, the current price can indicate the possible profit that can be made at that level. Buying it at a higher price than the current level but lesser than the target will result in lesser profits. But waiting for the price to drop from the current level and then picking it up can increase the returns. Also, the lower the purchase price, the lesser will be the risk potential.
So, getting the entry point right has the twin benefits of a higher profit margin and minimal risk, besides increasing the chances of success in that trade.
Now that you have done the investment at the best price possible, the logical next step is to exit it Stop Loss 조정 at the right time. This is identifying the highest point of appreciation at which you can exit with the highest returns possible. The secret here is to know your target price well enough.
All exits happen through one of two outcomes - getting a profit or incurring a loss. While we will come to the loss in the next point, let us get to the more positive outcome first.
Every trade that is entered into is, Stop Loss 조정 primarily, with the objective of making a profit. This profit, in simple terms, is the difference between the appreciation and the purchase price or the price at the point of investment. The point to which an investment can offer Stop Loss 조정 returns is the target set while making the entry.
Identifying the target price is the result of the analysis based on the technical and fundamentals of the investment planned. It is also the result of studying the track record of price movement.
Once you fix a target price, there is the possibility of waiting till the price hits the target and you make a100% of the planned profits. It is also possible to sell a part of the purchase at that point and defer the balance to expect higher gains or even minimise the risk, should there be a fall in the price. If the anticipated target price looks unattainable, it could be beneficial to book profits even if the appreciation falls short of the target.
All trades may not end with a favourable outcome and would demand that you have a Plan B. In trading, when your call fails to hit the mark, for whatever reason, the next best thing would be to curtail your losses.
This is what the strategy of stop loss is all about. This planning should happen right at the point of deciding on an investment and fixing the target and entry prices. Based on your analysis find the point at which there is support below the current or the entry price.
Whether he likes it or not, an investor has to draw the line below which he will not allow his investment to dip. The challenge here that most beginners and even experienced traders face is the non-adherence to this stop loss price they themselves set. Seeing their investment not just miss the planned target but also slip below the entry price can be frustrating and tempt them to hold on without exiting.
If he makes the mistake of holding on by hoping for a rebound, he runs Stop Loss 조정 Stop Loss 조정 Stop Loss 조정 a big risk. A recovery may happen but, in the event of the price tanking, the investment can end in huge losses too which could have been curtailed with the stop loss strategy.
For any trader planning to make a move in the market, this price trio of entry, target and stop loss are the concepts that he has to understand and execute well. The three price points of the entry price, the target price and the stop loss price are the tools that help you calculate the risk to reward ratio. To ensure that the focus is on maximising the rewards and minimising the risk, any investment needs to be done with these three points covered.
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