Getting Out Of The Way – Stop Management for Traders

Stop management is a big issue for some traders. Here are some suggestions for managing stops that have been proven to work. Some i've used, some not.

The first is a time based stop. For example, if the position hasnt show a profit in 3 days, exit. Intra-day trades might be 2-3 hours.

A percent retracement stop, as the name implies, is a stop triggered by a set percentage (5%, 2%, .5%, etc.) from the entry and/or the new highs/lows. In an uptrending market, the trailing stop is recalculated, to make a new high. In a downtrending market, the price is recalculated as price makes new lows.

A volatility stop is designed to compensate for noise in the market- like bollenger bands. There are two main variables to think about: how many bars to consider for your stop, and what multiple you are going to use. The number of bars, or range, is needed to determine the average distance the market moves(high to low). The range then becomes normal. The multiplier is then used to trigger a price that is not normal. The short entry stop is the lowest close added to your range times your multiplier, and the long entry stop is the highest close minus your range times your multipler.

A pivot stop is a favorite of mine, and is based on finding support and resistance levels called “Logical Points”. Using these points can, however, lead to taking too much risk. Or missing trades, because the risk is too high.

Don't find yourself waiting for a good time to get out- get out if you're wrong. Don't be stupid and stay wrong. Once in a position, you may also want to monitor momentum. If there's a drop in momentum, it may signal a possible exit.

You should always have written exits, and always use stops. Which you use will be up to your trading strategy, but they have to be in place.