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01 October 2020
STOP LOSSES 2

01/10/20

STOP LOSSES 2

Where to set stop losses is always a tricky judgement. The following methods may be suitable for you.

METHOD 1

Use only that which you are comfortable losing by setting a percentage of your available Capital as a maximum. This percentage will vary depending on your appetite for risk but should be in the area of 1%-4% per position to keep you in the game. This means that you should be able to handle any losing run provided the win/loss ratio of the system you are using is reasonable ie better than (say) 50/50.

METHOD 2

This is slightly more technical as it uses the Average True Range (ATR) of the product that you are looking at. It has the benefit of being more flexible in that the risk will be adjusted to match the current volatility. If your fixed percentage risk is (say) 6 units but the volatility of your target is (say) 10 units it is likely that your stop will be hit even although the trade might be perfectly sound. So use the ATR (over a time period that you are happy with) to calculate where your stop should be by setting your risk %, setting your ATR number, then calculate risk%/ATR  which will give you the size that you are able to put on your trade.

These methods should allow you to succeed at 50/50 or better provided you let your winners run to a conclusion. But as in anything, there are no guarantees.

THIS NOW CONCLUDES OUR MONTHLY NOTES – THANK YOU FOR READING

 

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