How I View and Use Stop Losses

This was an email that I sent to a client regarding stop losses - hopefully it helps give an idea of how I view and use stop losses:

 

For me my stop is dependent on the trade itself.  I do NOT use, for example, a 20 tick stop on all my YM trades.  I find that each trade is unique and therefore needs a unique stop.  Others may disagree but for me this strategy works.  Also there are some trades where I will pair into a position and then the stop will be based on the cost basis of the position not the initial entry. Along the same lines I also am a BIG believer in managing risk by controlling size. If your maximum position size is 50 cars but you only initiate with 10 cars then you are controlling risk from the start and can afford to take a larger stop then you would if you initiated with maximum size, 50 cars. 

 

As a general rule though I use a 13 - 30 pt initial stop (not hard stop) on the YM if I am not pairing into a position. If you are not pairing in there is rarely a need to use more than a 30 pt stop on an intraday trade - especially in this slow market. Obviously Fall 2008 that was not the case :)

 

I rarely put in a hard stop with my initial entry unless I know I won't be monitoring the trade. I have enough discipline to get out if my trade parameters are being violated. A lot of times my stops will be based on over or under and HOLDING a certain level. Say I am short 11050 on the YM and I don't want it over and holding 11068.  Well we could go hit 11073 fast and then get back under 11068 fast and if I had a hard stop sitting I would be taken (stop stolen) while the premise of trade was still valid. Yes this costs me extra ticks sometimes when I do exit a loser but I have found that over time this approach pays off.

 

The time I will put in a hard stop is usually once I get a scale or two and then determine okay if it hits X level I want out.  I'll just put in the hard stop so I don't have to worry about it. 

 

Hope this helps!