BPA trading room Q&A: December 10, 2015
I bought higher into an upswing. Under which cases would I hold it all the way to the logical stop versus getting out sooner? Bar 3 as an example.
Video duration: 2min 46sec
Video transcript — Wide stops & when to get out
So are you saying — let’s say you buy the 3 close, okay? Where do you get out? And that’s a very good question. It’s an important question.
If you buy the 3 close, is your stop below 2 or do you say, “Aaa… It’s a trading range. Might be a double bottom—might be buyers below 2.” If I bought the 3 close, I’m definitely out below 4 or on the 6 close, three consecutive bear bars, two of them closing below their midpoints. If you buy the 14 close, you either get out below 16 or on three consecutive bear bars, 18 or one tick below 18. So, those are my general rules.
Rarely let your wide stop be hit
Anytime I’m taking a trade and I have a wide stop, I never want to let my wide stop get hit, so if I buy the 3 close and I have a stop below 2 or below 81, I have no intention of letting that stop get hit. So I plan — that’s my catastrophe stop. If I pass out, if I faint, if my Internet Service Providers go down, if anything happens, I want to have something in the market that will limit my losses, should the market go against me. But I rarely would ever let a wide stop get hit. And as a default, I look for other reasons to get out. The 4 low closing on its low top of a bear channel, that’s a good reason to get out. Three consecutive bear bars; 4, 5, 6 — three consecutive bear bars; 16, 17, 18 — two big bear bars; 64, 65, followed by outside down 67. So if I am long, I’m not going to rely on my stop to get out. I’m getting out at the market or on the stop below the low of the current bar.
Act on your premise for trade
So, at some point you have to decide that the probability is that your premise is wrong, and once you make that decision you cannot continue to rely on your stop. Once you know that you’re probably wrong, that the premise is no longer valid, you have to get out. You just take the loss and don’t rely on hope saying, “Okay, I know that I’m probably going to lose relying on the stop, but maybe I’ll get lucky and maybe the market will come back and let me out with a small loss.” That is not trading. That is not good mathematical logic. To me, whenever I think I’m wrong, I say, “Okay, I’m wrong. I’ll get out. I’ll take my loss and I’ll look for the next trade.” I think that is a much better way to handle it.