Initial stop placement is always a problem area for traders,
especially if you are a single lot BPL trader like me. Many times Market will
take away our stop before going in our direction. Nothing is more frustrating
than this. We can’t help. It is all in the game. How can we place more
effective stops? Let me share some thoughts.
I always trade away from DP so that I can hide my initial
stop behind a DP. But it may not be possible always due to RR considerations.
So we have to think about alternatives. We will have a look at some scenarios
Look at Pic 1. Price breaks a DP and pullback forming a
swing high. Now there are three ways to enter into this pullback.1.At DP on
pull back with stop below DP .2.Entry on a formation say a pin bar with a stop
below it. 3. On break of swing high with a stop below the pull back low. Mostly
I go for the third type. I expect this
broken swing high to act as Flip and give support on the way down. If the swing low is very far I
scratch on break of the Flip. If RR permits ideal stop is always below the DP
Pic.2. deals with a TST. Ideal stop is above DP only. But I
wait for a swing low formation and short below it to have two layers of defense,
a Flip and a swing point. Stop can be placed above second push swing high if DP is too far. If
the bar which triggered the entry is a WRB we can place the stop above this
bar also.
Pics 3,4,5, refers to a BOF. For a BOF the best stop is
always above the extreme. There is no point in keeping stops much above the
extreme because once price moves above the extremes, stops will start
triggering and price may move up causing more loss to you. As per the situation
keep stop losses above DP, swing High or WRB high.
Pics 6,7 &8 relates to a BPB. As you know the ideal stop
is below the DP. Alternatively it could be below a swing low. But there is
always a danger of a complex pull back happening. Only way to avoid it is to
have stop below the DP or exit the trade on break of the Flip as a scratch.
Pic . 9. While trading a direct breakout always be well
aware of this trap. Price attempts to break a range high many times creating a lot
of stops above this area. Before the breakout ,price consolidates just below the
range high forming another narrow range high. After the breakout price will
pull back to this consolidation high breaking the range high to the down side. We will think it
as a BOF and exit. Others will short the BOF. Price will reverse from the consolidation high with a vengeance
trapping the majority.
There are no hard and fast rules for price action trading. Price action
will unfold in million ways. The ability to think and adapt to the changing market
conditions is very critical in trading.
Hi ST, what is your opinion about using ATR based stops?
ReplyDeleteThe 14 period ATR on 3 minutes is around 13 now so a 2 ATR stop "should" work but many a times that is also gone. Maybe a 3 ATR? but then we are leaving too much on the table.
Thanks,
Thank You very much sir for this post..
ReplyDeleteGuptak03
SS
ReplyDeleteI do not use volatility based stops at all.
I prefer structure based or to be precise order flow based stops.
Imagine we are going long on a BOF trade and our entry is 8 points above the extreme low.
There could be tons of orders below the extreme low. Stops of new longs as well as new shorts. Once these orders start triggering there will be a momentum move down This may take out the 1,2or even 3 ATR stops. We may end up losing 39 points instead of 8
We must exit the trade when the net order flow turns unfavorable, whether it is TP or stop out
ST
Very nice article...just like your other articles...simple and clear..
ReplyDeleteThanks for posting all these valuable info...
I wanted to ask you a question...Where do you learn all these from?
Thanks
Rajiv
Rajiv
ReplyDeleteWhere else from?
WWW only
ST
sir reply plz
ReplyDeleteRajiv
ReplyDeleteActually the method is a cocktail of so many concepts I read and learned from the internet over the years
This is my own thing and this is the only place I write about this
ST
Dear Sir,
ReplyDeleteWords fail me to express my gratitude for this wonderful post and believe it or not I was going to write to you for posting your thought process on this topic. There you answered my prayer.
Please, if possible and convienent, make pdf files of your important posts.
Thanks a lot again.
Siddarth
Hi ST,
ReplyDeletePlease can you tell under which situations would you go for a type 3 trade and where exactly would you be entering? This is a really awesome chart that you have done up. Thanks a lot.
S Roy
DeleteType 3 trades happen when there is an immediate price rejection.
Usually I enter on break of the BO bar low
ST