This little trading tip can and will make a difference in your trading results in 2009.
Stops are enormously important part of a traders arsenal of trading tools. Some traders confirm that stops are the most important part of their trading armour.
So here are three ways to use stops to protect your capital and lock in profits from a trade. These three money management techniques can be used in stock, futures and forex trading.
The important rule is that you do use a real stop in the marketplace. A friend of mine joked with me that that he had never seen a "mental stop" filled electronically or in the pits.
If the market is good your stop will not be hit. If the market is bad or changing direction then you'll want to be out of it anyway. That is why stops are so crucial to trading success.
Here are the three most commonly used types of stops. Which one do you use?
(1) Dollar stop.
(2) Percentage stop.
(3) Chart stop.
If you chose (1) you'd be correct, but, you would also be correct if you had chosen 2 or 3. All three are money management stops and are used to either lock in profits or protect capital.
1) A dollar stop, is when you set a predetermined dollar amount to a trade. Let's say you want to risk $500 on a grain trade or $750 on a stock trade. Once you get your fill back from your broker or electronically online you simply figure from your fill price where to put your stop.
Pros: Easy to implement and use.
Cons: Can place stops too close in a volatile market
2) Percentage stop, is a very simple way for you to place a stop on a position. Here's how it works. Let's say your trading account is 100,000 dollars and let's say you only want to risk 1% of your total portfolio on any one trade. You simply take a $1,000 risk which represents 1% of your over all portfolio. This can help enormously in avoiding taking BIG LOSSES. A 1% loss is easy to absorb. A 30% or 40% loss in a trade is an account killer, and should be avoided at all costs.
Pros: Easy to implement and use.
Cons: Can place stops too close.
3) Chart stop, a chart stop is where you place a stop that is either above or below a crucial chart level. The good thing about a chart stop is that this level is often used by other traders. That can both be a good thing and a bad thing, here's why. Using either one of our first two examples only you know where the stop is. With a chart stop, a great many traders/brokers know that is where the stops are. In an illiquid market this type of stop should not be used, as many times brokers gun for the stops. In a highly liquid and active market this is a good stop to use.
Pros: Very easy to implement and use.
Cons: Can't be used in thinly traded markets.
So there you have it. Now you have all three ways to manage your money and protect your profits in 2009.
Use stops…let them work for you.
Be Our Guest
We welcome syndication of our content in your blog or on your trading website. Please feel free to use our content with attribution - more details here to syndicate our content
45 thoughts on “How to effectively use stops to lock in profits (new video)”
There is no perfect stop system, it depends on one's risk tolerance. One way to re-enter a position when you are stopped out is to wait until a market makes a new three day high (when trading within a major up trend) and vice versa in a down trend.
Hope this helps.
I really benefit from Market Club but have been unable to rationalize the triangles relative to the video comments. I understand how to use monthly, weekly and daily triangles but have trouble reconciling that with the comment on your talking chart that invariably says something to the effect of "set tight money management stops".
Ok, so we do that.
Then we get stopped out.
At what point do we re-enter?
It would be most helpful if you could be as specific as possible in your response as the logic simply does not follow as presently structured; or at minimum there appears to be a CRITICAL piece of logic missing.
Thank you Adam for a great job explaining the fundamental types of Stop Loss methods and later on the 02/22 blog Lindsay has provided a great video illustrating how to use the Parabolic method to determine the actual stop loss level for those who already have the Market Club software. To increase in the confidence of the performance of the Market Club software for those who don't have the software it will be very helpful to see some Forex spot market ( that is all I trade) specific videos showing the system generating the Buy and Sell Signals coupled with their specific Stop Loss values based on say Lindsay's method the same time frame and currency pairs when a demo trade was placed and how the trades performed based on the signals. I agree with Adam that if one does not use Stop Loss they will not trade for long unless they have unlimited risk capital. The accuracy of the Market Club's signals can only be confirmed if each video shows the full trail of the trade from the time the signal was generated to entry, stop loss entry and exit. Thank you for all your help and consideration.
Thanks a lot Adam. This confirming my Trading Plan as i myself would like to determine my RISK first before Pull the Trigger for any Trade Decision. Eventough i'm a Day Trader or sometime holding my positions less than a week or so; my initial Stop Loss usually Less than 3% of my account. That's how i'm doing it. Thanks again.
But sadly to say that some of website is promoting a Mental Stop Loss which or No Stop Loss at all , I think these thing must be avoided at all cost. I myself prefer a 3% losses rather than 50%.
I want to Sorry to you Ram...
I submitted a rather lengthy comment on this post Friday night (early Sat. a.m.) and do not see it here. Did you choose not to run it, and if so why, or did it get deleted by mistake? Just wondering...
It takes a little bit of time to moderate comments and to respond to each one. I'm sure Adam will get to your comment as soon as possible. We appreciate everyone's detailed responses to post, but it does require more time on our side.
Keep your comments coming,
Director of New Business Development
INO.com & MarketClub
I saw your Video how to put Stop Loss. I am going to use the Techniques you have given.
I did Forex Day Trading from 12/18/08 to 01/05/09 with Deposit $3900.00 reulting in Net Profit $3 370.91 with all winning 32 Trades without putting Stop Loss but I lost Entire amount in one last Trade because I did not put Stop Loss. Now only $335.00 is left in my Account.
I use the "Market Club stop." On equities I wait for the weekly trade triangle to change, then I sell. In a way it is a "mental stop" in that I don't really have as stop into my broker. Do you think this is a bad thing Adam?
Thank you Adam for your commitment to education, and for your clear precise way of communicating the message.....I get a lot from you, and I am only on your free list...!! That may change soon......Regards....Joshua.
I have been a member of Market Club for over a year. I was cautious when I first joined but the reality is that I easily pay for a year subscription with most trades. My one regret is that I have taken long term positions in certain stocks due to emotional reasons instead of just following the triangles.
What is a SAR stop?
Below is a video talking about SAR Stops. It may be hard to see the text in the video, but the audio should answer you questions.
Director of New Business Development
INO.com & MarketClub
Thank you Lindsay;
That is a perfect example of what I was looking for as an adjunct to the original clip. Within a couple of minutes, you demonstrated using the tools of the site, how to find the SAR Stop.
Thank you again.
Great video on SAR stops, Lindsay. Very clear explanation. Glad you mentioned that the key to successful use of the SAR is to only use it in a strongly trending market. This can save traders from a series of small losses from the chop in sideways markets.
I actually did a video series on a live trade example settings price stops / trailing stops using support / resistance levels, fibonacci retracements, and parabolic SAR. All of these are chart stops, and each seems to be very effective depending on the chart.
I think it's time to do an example using these three methods, as well as simply using trade triangles. I'm going to pick a couple of stocks and do a live trade example using all 4 methods.
PS, click on my name above to go to the video series.
When a stock exhibits criteria that I identify for purchase, then right after the purchase I put in a trailing stop in case the stock reverses. If the stop is too tight, I will wind up selling too soon and for a small loss (say 1%). If the stop is too loose, then I risk a reasonable loss (say 4%). Recognizing that stops are a "personal" thing, is there a general rule of thumb for the stop size relative to the stock beta that is placed after the purchase? I am only speaking to the time frame after the purchase (say 1 day).
You lectures and delivery are concise, attentive and very current. These are things not seen in other sites.
Thank you , Dean Handley
I guess the oldest bit of advice to beginning traders is to cut your losses quickly and let your profits ride. On the other hand, it's also suggested that a trader should always have a target price on a trade and when your target has been achieved, get out.
Why have a target? Why not move your stop progressively closer to the current price on a winning trade and then let the market take you out? The price might go higher still. If it doesn't, you have still locked in most of your profit.
Why not sell a proportion of your winning position (say 1/3) at the pre-selected target and let the rest ride on a tight stop?
I do not disagree with your approach of selling a portion of one's position on the way up and using a trailing stop. Eventually the market will take you out but it may go much further than you first thought allowing you to let your profits run.
Excellent comment, thank you.
Could provide a video that shows how stops are utilizes Stops in Forex using the Market Club Triangle system with signals?
Thank you for your feedback and your compliment. I will try to get something up online in the not too distant future. Please be patient as we all very busy at this time.
All the best,
I thoroughly enjoy your classes as I learn Basic Stock trading
I am learning on the ETF "cvy"
Something strange happen to me with this thinly traded stock I wish you could explain
Go to the chart and note at two recent openings the stock once made a sharp drop down and then on another day an equally sharp uptick at the opening
Immediately afterwards, the stock went back to its normal pattern of trading
When the stock made the major dip down this snagged me with my Trailing Stop I had set at 1%
My question I guess is this: why would someone either buy or sell a stock at significantly higher or lower price?
Is this the danger someone having a Market Order in and I somehow got hit with a sell with my Trailing Stop to Sell I did not want to sell with this false condition?
I have to admit I am not the biggest fan of ETF's. Some of the ETF's track very badly and they can be thinly traded. When the market is thinly traded you're going to have problems with stops. We explained that in the video only trade big liquid markets.
I hope this answers your question.
All the best,
Can you suggest what the % stops should be? Or should there be multiple % stops. For example, 40% at minus 5%, 40% at minus 7% and the remaining at 10%
As I said in the video stops tend to be a very personal matter and what works for me may not work for you and vice versa.
The important thing is not to take big losses. Everyone can come back from a reasonable loss but if you get in the 50-60% losses it's very difficult to come back for most traders.
The bottom line is the bottom line. Use stops in your trading.
All the best,
Found you guys on a psychology blog, good work on videos! Do you have any videos that explain equity risk premium? And have you considered incorporating "Psychology of the Call" blog on your portal? It is by far the best resource for traders that we have read.
The video will not play properly on my computer. Other format you used played fine as it allowed it to load 10% before playing. Is there a setting you can adjust on this format to allow it time to load (10%) before playing?
As for options, my comment would be that it's very easy to get stopped out on long option positions. They can (and do) fluctuate rapidly, and you can get knocked out quickly unless you set your stop at 40% or above.
Personally, I don't use them on long option positions since a trade that starts out significantly underwater can rapidly recover into profitable territory. If you want protection on your longs, a better strategy would be spreads, in my opinion, where you can set your maximum loss tighter than a naked long. You could sell the front month, and buy a later month at the same strike, for example.
Since I couldn't see the video, I don't know if you mentioned trailing stops. These are a great way to protect against losses and lock in possible gains. If you're using these on Forex, remember you still have to put in a fixed stop when you open the trade as it will only protect you once you're 1 pip into profitable territory. At least this is true on IBFX, which I use.
If the trade goes against you at the offset, a trailing stop will leave you exposed. So always open your trade with a fixed stop, then add a trailing stop later after the trade is going in your favor. This may also be true on stock trades, depending on which broker you use, so be cautious here too.
Thank you for your feedback. There is nothing wrong with the video as is being played thousands of times already. It is a flash video so you may want to upgrade your flash player.
In the video, yes I do mention trailing stops in using the SAR or moving average as a stop. Their are other technical indicators you can use just as effectively, but they are the ones we mentioned in the video.
All the best,
MarketClub, like many programs relies on an established trend to make big profits. We do not advocate daytrading.
As a trend is established and continues (see our recent video on the Dow trend) stops moved up, or in the case of the Dow moved down to protect profits.
We do this using our weekly triangles. The beauty of the weekly triangles is that they tend to keep you in the big moves and help avoid whipsaws when you filter your trades.
The stops we discussed in our latest video are other types of stops that you can use to protect capital. Every trader is different in this regard, what works for me, may not work for you and vice versa. It all depends on your trading personality.
I do not understand your stock analysis--downtrend, uptrend, etc.
Can you explain?
A downtrend indicates that a market is going lower. An uptrend is just the reverse and indicates that a market is going higher.
I hope this helps.
Adam: I have noticed in your videos on quarterly results, you seem to use the reversal arrow as a sell and not any of the above stop orders?
You are 100% correct.
We did it this way as it is easier to follow and is how MarketClub's Trade Triangles should be used in their purest form.
All the best,
Thanks Adam! I'm a newbie at MarketClub and STOPS are a crucial part of my trading game plan. However, how can we efficiently use stops to protect our profits? How can we efficiently raise our stops to protect our profits yet not too tight so as to enjoy further possible trend run? Would like to hear your views. Thanks again!
I find that often my holding sells below the dollar stops I set, whether with stocks or ETF's. Could you please comment on that situation. Thanks for the ongoing education.
Thank you for your feedback. One way to avoid getting filled sharply lower than your stop if to place a stop limit order. Some exchanges accept this type of orders others don't.
On a personal level I would rather be stopped out of a market rather trying to finesse my limit price.
The other key is to be diversified this helps lower your overall risk and exposure to any one market.
Hope this answers your question.
All the best,
Thank you for addressing my previous comments that I had brought up on the 5 Markets and 5 Ways clips. You actually made a comment in this clip that hadn't been made clear in other references to stops elsewhere. The next step in the process would be to go back to the charts and show each of the stops against actual data. Using one of the charts that you had in the 5M&5W clips you could use Apple again between the Apr 7 (95.91 buy) and Aug 07 (128.81 sell). Would a successful strategy use one stop to preserve your principle or would you change it repeatedly to preserve your profit.
For the dollar stops and the percentage stops a simple formula can be created where you enter the amount of capital you have, the price of the item and then enter the dollar or percentage that you are willing to risk.
Is the SAR a good value to use as a technical stop?
Thank you once again for your feedback.
Stops are a pretty personal thing and it is something that a trader must decide on their own. We all have different trading personalities and some personalities are best suited to different types of stops. The important element here is to use stops in your trading.
In certain market conditions using a SAR stop may work better than let's say a dollar stop, it just depends on the individual trader and market.
All the best to you using stops.
I appreciate your guidelines on the use of stops. I am trading options,would this be any different?
Stops are stops. It doesn't matter what market you trade you need to have some form of protection for your capital.
Capital is the commodity of a trader and must be protected at all times.
All the best to you,
What a ridiculous article, and misrepresented -- it's not "Tip and Tricks on Using Stops," but simply a list of the types of stops. There's no specific advice at all, such as William O'Neil's (founder of Investor's Business Daily) rule to sell if a stock drops 8 percent below the buy price. (Don't know if that's good advice or not, but at least it's specific.) The problem with stops is that they can shake you out of a good stock (option, future, etc.) on a temporary downtick. But NOT using them invites big losses. I've experienced many losses from both scenarios.
If this is the best "advice" Adam Hewison can give, he should give it up and find another line of work.
Thanks for your feedback.
It may not be the best advice I can give but certainly is better than no advice. Most traders do not use stops and as you said clearly in your comment and I quote "but not using them invites big losses".
You made my point, by not using stops your are inviting even bigger losses to come into your portfolio.
I have been involved in the financial markets both in Chicago where I was a member of several exchanges and also in Europe where as a member of the London international Financial Futures Exchange.
Unlike a lot of other gurus who talk about the markets I learned about the markets from some of the best traders in the world on the floors of the exchanges. I'm sorry you didn't find the advice I gave pertinent to your own situation but that's the advice I give to all beginning traders, and that is to use stops.
In response to Democritus, I am reminded of the occasional student that I have taught over the years who would interrupt me and start talking about something unrelated or more advanced than the lesson I was giving. Success is the result of exercising a series of good habits over and over again.
Adam and staff keep hammering the messages home:
Follow the trend
Protect your equity with stops
Follow the triangles not emotions.
(Sell short in a bear market - my own contribution)
Dear Adam and David . .
Thanks for your responses. Adam, you described stops well in what you wrote (I haven’t seen the video) and I’m sure the description will be helpful to “beginning traders,” as you say. My only complaint is that the ad I opened didn’t say anything about “beginning traders”; instead, it promised a “trading tip” on “How to effectively use stops to lock in profits” -- so I expected a STRATEGY and was disappointed to find nothing more than a basic description of stops, and thus thought that the information had been “oversold” in the ad.
The key word in this discussion is EFFECTIVELY -- as in “How to effectively use stops to lock in profits” -- because the problem with stops, of course, is that they are a two-edged sword. They can indeed protect capital and prevent big losses. The problem is that they can also prevent big gains! You write that “If the market is good your stop will not be hit. If the market is bad or changing direction then you’ll want to be out of it anyway.” But a stop can get hit whether the market is good, bad or changing direction. The legendary, Warren Buffet-like returns that we all long for -- from buying Google, Microsoft, Intel, Dell, Wal-Mart, etc. etc. etc. when they are still cheap -- are difficult or IMPOSSIBLE to achieve if one uses stops, unless the stops are kept so loose as to be of little value. Almost every great stock will make periodic dips of 20 percent, 30 percent or even 40 percent while it is climbing, which means that those using stops get shaken out and miss out on the big gains.
That’s the dilemma of using stops, and the dilemma I was hoping Adam could help me with. And if you can figure out a way out of that dilemma, Adam, I will be forever indebted to you!
Thank you for your feedback. Please take the time to watch the video I believe it will help you understand stops much more.
Here is the link:
All the best,
Comments are closed.