[quote=“cndlstckchic, post:7, topic:117550, full:true”]
I think if you have a trade you’re considering, you should have (before you enter) a solid idea of where if it moves against you - your trading plan will be scrapped. That would be a logical place to put your stoploss. And then calculate your position size based on the desired size of your stoploss.[/quote]
Determining a logical stop-loss is one-half of the equation. Determining a logical profit target is the other half. Here are two posts from several years ago, in which I discussed my methodology for determining SL’s and TP’s –
Posted in February 2010 –
[quote=“Clint, post:2, topic:31606, full:true”]
[B]Regarding stops and limits:[/B]
Determine a rational point at which to place your stop, without considering where to place your limit. Then, determine a rational point at which to place your limit, without considering the ratio between your stop and your limit.
After you have chosen your stop and your limit, independently of one another, then compare the two to determine the implied risk/reward ratio. If that implied ratio does not comport with your trading rules, then you should reject the trade. Do not manipulate your stop, or your limit, or both, in order to make the ratio fit your rules.[/quote]
Posted in June 2011 –
[quote=“Clint, post:3, topic:38657, full:true”]
Have you ever done this?
You study your charts, and find a situation that catches your eye. You really like the way things are shaping up for this pair. You conclude that this pair is poised to move higher, and you want to get on board.
You open a LONG position, and immediately set a stop-loss to protect yourself. Your stop-loss is 30 pips, because that’s about as much pain as you can stand.
You definitely want this trade to justify the risk you are taking, and you have heard the advice of the “experts” to use a R:R ratio of at least 1½:1, so you decide to set your TP at 2R — that is, 60 pips.
Now, you sit and wait. Price moves up and down, up and down, up and down, all the while trending higher toward your TP, and you’re feeling hopeful.
At about +30 pips, price stalls and begins to retrace a bit. You start to sweat, but you hang in there, because you’ve always heard, “Cut your losses, and let your profits run.” You don’t have a loss; you have a small profit. So — determined to let it run — you hang in there. And sweat.
There are lots of scenarios that could unfold from this point forward. Obviously, the desired scenario is this one: the retracement ends, price resumes its upward move, and your TP is hit. But, you’re telling us that it almost never works out this way for you.
So, let’s analyze this trade from a different perspective.
There are two horrendous mistakes in the way this trade was structured.
• The first involved the STOP-LOSS. Placing a SL at your pain-threshold is about the weakest thing you can do. Probable support levels should have dictated where you placed your SL. Support comes in many forms: previous daily, weekly, and monthly lows (or highs); pivot levels; fibonacci levels; and even trendlines (which are potential dynamic support or resistance levels).
If your chart suggests a logical place for your SL, and it’s more than you can tolerate, then either (1) cut your position size in order to make your risk in dollar-terms acceptable, or (2) this trade is just not for you — wait for a better one.
• The second horrendous mistake in the trade described above involved the TAKE-PROFIT. Placing a TP at a point that will make you a certain desired profit is as bad as placing a SL at your pain-threshold. But, that’s exactly what you did in the trade described above: you arbitrarily decreed that price should rise 60 pips, because 60 pips is how much you wanted to earn.
Probable resistance levels should have dictated where you placed your TP. Better yet, two or more probable resistance levels should have dictated two or more TP-points; in other words, if possible, you should have scaled out of your position in a way that covered your risk as quickly as possible, while still allowing the remaining portion of your position to run further into profit.
Suppose you do all this analysis, and determine that probable support and resistance levels are offering you a trade with only R:R = 1:1? If R:R = 1:1 is unacceptable to you, then this is a no-brainer — you don’t take this trade.
When you open a chart, you are viewing a battlefield. Before you wade into that battle, let the strategic and tactical situation on the battlefield (not your pain-threshold) define the risks. And let the strategic and tactical situation on the battlefield (not your greed, or your fixation on a R:R ratio) define reasonable potential profit objectives.[/quote]