The Hidden Secrets of Successful Stock Market Trading Rules - Fine-tuning Your Stop Losses
By David Jenyns
There are two cardinal successful stock market trading rules that I am sure
you are quite familiar with by now.
The first of the two most common stock market trading rules are to cut your
losses short. The second of the two most common successful stock market trading
rules are to let your profits run. However, you can take it one-step further by
fine-tuning your trailing stop losses, and becoming more risk seeking once your
stock is in profit. Increasing your risks, at the right time, can allow you to
get all the profit you possibly can out of your system. You may wish to test the
effects of these successful stock market trading rules by having a wider
trailing stop loss than your initial stop, and see how this is reflected in your
For example, you could set your initial stop loss at two ATR but set your
trailing stop loss as three ATR. This allows the stock, once it's in profit, a
little bit more room to move. You're still limiting your risk at the beginning
of the trade by keeping a tight stop loss; however you're going to become risk
seeking in a profitable situation. That is to say you'll be willing to risk more
once you're already in profit.
Personally, I think this is one of the many successful stock market trading
rules you can use to take it a step further than most people are willing to go.
With this strategy, I also mix and match my stop loss methods. For example, in
one of my stock market trading rules, I set my initial stop loss at 2.5 ATR, but
my trailing stop loss is calculated using a completely different method. I use
what's known as the lowest low stop. The way this stop loss works is you find
the lowest low in the last X number of periods, and base your trailing stop loss
Now, for that trend following system, I actually find the lowest low in the
last 40 days. I then position my stop one cent below this low. It's almost as
though it's consulting the price action itself by identifying where the lowest
low is, and this can be highly effective. Many times my stop has been set one
cent below a support line.
The way this trailing stop loss works is that on each day a new trading day
is added to the chart, and one of the old days drop off. I then find the lowest
low in the last 40 days, and reposition my stop at that point, if it needs to be
repositioned. This stop has been extremely valuable for me, and it may be a stop
loss that you may want to consider testing.
But, before you go looking for that perfect trailing stop loss, realize that
in it's own way, it's very similar to the initial stop. There is no perfect stop
that will guarantee to get you out of the stock at the perfect time, and save
you the most profit.
Sometimes it will work for you. Other times it won't. The real key and secret
of having a stop loss and an initial stop do their best for you is not how you
calculate it, it's just having them in place.
You need to find an initial and a trailing stop loss that you're comfortable
with. You also need to understand how they work so that the actions they direct
you to take makes sense to you. How do you find a stop that you're comfortable
Test them. Pick out a whole lot of charts of stocks that you've been looking
to trade, and marking where you would receive an entry signal, set various
initial stops and trailing stop losses. Progress through the trade, revaluing
your trailing stop loss and see which one works the best.
Often successful stock market trading rules are designed with simple concepts
that works best at this point. When you base your system on understanding,
rather than optimization, you are more likely to stick with it. If you can come
up with a good, straightforward set of your own stock market trading rules, you
will be able to apply it across a number of markets on most trading instruments.
Really, when designing any system around a set of stock market trading rules,
all components should apply to this same principle. You want to keep things as
simple as possible, that way it's robust and can be applied to any market. As
long as you follow this underlying principle, you'll be on the right track.
About the Author
David Jenyns is recognized as the leading expert when it
comes to designing profitable trading systems.
His most recent course Trading Secrets Revealed is a step-
by-step trading roadmap to having excellent money management.
Learn how *you* can become one of his students.
Click Here ==> http://www.trading-secrets-revealed.com
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