Connect with Peter on LinkedIn!

Fixed stops

I am not a fan. At least for weekly trend trading systems.

Many things we are taught to do when trading, often do not work well, a reason why many traders struggle to perform in volatile markets. I am not suggesting you do not have a pre-determined exit, for that is essential, however fixed stops, particularly sell orders placed at certain prices, often just whip you out at the worst possible price.

Below is just one recent example, there have been many others this year.

If you were lucky enough to pick up ISX, when it triggered the 52 week high at 22 cents in March this year....... and then had the conviction to hold the trend until the exit signaled (the Trading mindfully using Winning Probability system sell rule) you would now be faced with holding a volatile stock. The bottom line is though, if you were committed to the systems sell rule, you would do nothing and wait, which for many traders seems a psychological impossibility.

So you think, I need a fixed stop! Ok, let’s put one in. We will use the rule “if the price penetrates the 24 Exponential Moving Average, our pre-set sell order placed in the market will sell the stock”.

So on Thursday 19th Sept (last week) the price fell to a low of 66 cents, the sell order had been placed where the 24 EMA was, at 76 cents, (the black moving average on the chart). Since the price penetrated the 24 EMA, it activated the fixed stop sell at 76 cents. In fact, it may have sold at a lower price depending on the price action on the day.

By the close of trading the next day the price recovered to $1.005 which is 33% higher than where you got sold out. As I write this, the price is now $1.05 up another 5% from the fixed stop. A 38% difference. Oh yeah, that is just one example, you may be thinking. Well, the proof is in the testing. Testing shows that fixed stops, over the long term, make no difference to many weekly trend trading systems profits, in fact they reduce results and do more trades. 

This is not a one off example. During the sell-off in December last year many stocks would have been sold using a fixed stop, only to recover and continue their trend. You can look at stocks like JIN, PME, PNV, SSM and more recently CAR, CKF, COL, to name just a few.

Trading, and how you manage your trades is a very personal thing. As traders we need to be mindful of blindly accepting what others say is correct. A fixed stop is something you may want to use in your strategy, or it may not suit you at all. There are many statistics and articles about traders over trading by setting their stops too close, using agressive fixed stops or being unable to hold a trend. If reduction of loss and risk control is your objective, they can be achieved by adjusting trade sizing or by using profit preserve strategies.

As one of my trading coaches once said to me “if you have a system that works, leave it alone, if you want to improve your work, work on yourself!”

I am currently working on some new teaching modules, along with my second book, to help traders improve their mindset, to cope with events such as the stock ISX. I will be combining my 25 years of trading experience with 35 years of meditation and Zen.

Recently I completed some updates to the website, you can view them by clicking the links below, other pages such as the 52 week highs and Peter's Portfolio have also been updated.

http://www.easysharetradingsystems.com.au/how-to-trade/the-method

http://www.easysharetradingsystems.com.au/objective-and-planing/i-know-what-you-want

Some food for thought: Their are two reasons why traders fail to succeed at trading.

1/ they dont have a method

2/ if they do have a method, they cannot stick to it.

Have a think about that. Is that you?

Peter

If Facebook is more you thing, friend him here!