How do I determine where to place my stops?

There are 2 kinds of stops I use: 1) profit stop; 2) cost stop.

With either or both the profit or cost stop, these can also be trailing stops. It just depends upon what is happening and whether I can sit here for the whole time trading or not or just let my positions run with the stops in place.

I don't have a set 10% rule or anything like that. Since I tend to be more of a trend trader (and this is defined a bit differently than how other trend traders are), when the trend is broken, that's when I usually will get out.

Other times, I may just get out because I want to just close the position because I have other things going on and do not want to leave my position unattended. That will be a limit stop or maybe I will "flatten" my position and get out at market.

Often I will have limit stops for profits right near a pivot. If it looks strong, I'll have it on the other side of the pivot. If it looks weak, I'll pull in the stop to be closer. One can always doing a trailing stop, but sometimes I just want to be out where I want to be out.

If it's a cost stop, and it's near a pivot, I'll put it just slightly out of reach, so if it crosses the pivot, then I'll be out. Often this can be quite a costly trade, and these I tend to babysit. Usually I do not get taken out for these, but when I do, it does hurt, but I'm well aware when I set the boundaries on these trades that I can be taken out for a cost.

These pivots could be the moving averages, RSI, price action by itself. Rarely will I use MACD as a pivot. The ES really likes to pivot off the 200 EMA and 50 EMA. Often it will use the 10 or the 20 EMA as either support or resistance (depending upon which direction the price action is going).

There is an art to setting appropriate stops. Some people do a blanket 10% of their capital on that trade for a stop. That's fine, too. But, say if you had 1 contract of the ES and it's $500 for me, that would be $50. That is essentially 1 point. The ES often moves more than 1 point in either directions and you will find yourself getting stopped out a lot. That would be quite nerve racking for me and discouraging.

I attempted to employ a scalping method to take X number ticks for profits and then Y number of ticks for costs. I found I was getting taken out far more for costs than I was ever getting in profits. The net result was net costs. Not a good trading strategy for me, but it seems to work for a number of people.

Perhaps I like a more discretionary system of trading that may seem vague, but in reality, it isn't. It's just not quite as cut and dry as some other methods. It's okay. There is room for all different ways to make money.

This entry probably is more confusing than not about stops, but every single one of my stops are subjective. Sometimes I will have a stop that is much closer, because I don't want to bite the bullet with a 10 point stop.

What I will also do is switch between various timeframes to see what is happening on one chart as opposed to another. Let's say RSI is topped out at 90 on the 1 min. chart, but it's at 63 on the 3 min. chart, I will most likely get out if there is enough money on the table and wait for another re-entry as the 1 min. does a pullback. RSI cannot go to above 100 and rarely ever does. In fact, I've never seen it go to 100.

Even if one chart says there is room for it to continue bullish, you have to look at other timeframes to see if they are all agreeing. Another chart may say it's way overbought, so you have to take that into consideration at either the entry or exit.
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3 Responses
  1. Debbie Davis Says:

    Thanks Doris, these posts were really helpful. I listen to Eric Utley on the Trading Addicts website re: Futures trading. He uses the VWAP (Volume Weighted Average Price)as one more support/resistance landmark. I find it really helpful since it moves with the price during the day and for the most part when you're above it you're bullish and below it you're bearish. Just another tool. It looks like a moving average, but it isn't. I really enjoy your posts. Thanks again!

  2. Doris Says:

    Thanks for the compliments, Debbie.

    What is setting does Eric use for VWAP? My default is 14. I'll put that on my chart and see how it works.


  3. Debbie Davis Says:

    I didn't see any setting except "daily".

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