High Probability Day Trading Strategies and Systems by Backus Manny

Author:Backus, Manny [Backus, Manny]
Language: eng
Format: epub
Publisher: Wealthpire.com
Published: 2013-10-12T16:00:00+00:00

b. Percentage Based Stop. I touched on percentage based stops earlier, but let’s look at it a bit more closely. Many brokers will allow you to set up your trading platform is such a way that every trade you enter has an automatic percentage based stop attached to the order. So, for example, let’s say you are using a 1% automated stop loss system. If you set up your order system in this way, then the most you can lose on any one trade is 1% of the price of the stock. Using this method on our previous trade of IBM, your buy order at $183.30 would generate an automatic 1% stop of $181.47. Since this would require IBM to get to a new low of the day, then hopefully you would have manually exited the order before that point. But the benefit of the automatic stop is that you set a stop without having to think about it too much. You can still go into the trading platform and exit the trade before that point, but the automated system gives you a stop in case you forget to do it yourself.

But there are some disadvantages to this automated 1% stop idea. For some traders, it might create a nonchalant attitude about the trade. “Well, I’m protected in case something goes wrong. I’ll just play the odds and hope for the best.” This attitude comes from becoming a little too comfortable with the 1% stop. And the market will soon teach you why this isn’t always a good idea.

For one thing, your trade may get to within a penny of your target and then turn around and end up hitting your stop. If you were actively managing the trade, then would you allow this to occur? If you see your trade making money and then your indicators give you a sell signal before it hits your target, should you exit the trade and take the profit? I hope so. But setting up every trade as an either/or scenario is not the best method of trade management. If you have a high probability trading strategy, and you have extreme confidence in your system because you have traded it for a long time, then this sort of attitude might be understandable. But, for beginning traders, I think the risks outweigh the gains.

There is another way in which percentage based stops can be used. So let’s cover that now.

c. Trailing stop. A trailing stop can be used with either one of the two options already mentioned. In a nutshell, the idea is that you are setting limits on how far price can move against you. The language varies depending on whether you are going long or short. But let me use a long example and explain it. Let’s say you buy IBM at $183.30. Now let’s say you set a trailing stop of .5%. Here’s what happens. Every time IBM goes to a new high for the day, the broker calculates .5% off that top and the answer becomes your new stop.

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