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Trade to Win: Use Dynamic Stops
Stops are a key to trading, both where you place your stop and the market's constant quest to run stops (tells you what side is most vulnerable). In this article, the focus will be on the importance of where you place your stops as it can make the difference between being a winning or losing trader.
Dynamic stops
It is not enough to just pick out a level to place a stop as the process should be dynamic. In other words, you shouldn’t simply pick out a level to use as a stop and stick with it for new positions when market conditions change. A stop should be dynamic and not be static.
For example, let's say you use a support (in an uptrend) or resistance (in a downtrend) level as a stop for a long (or short) position. This doesn't mean you should use the same level as a stop if you are looking to establish a new position by buying a dip after the market tops out (or selling a blip after the market bottoms) and starts to correct.
This is illustrated in the following chart where the AT line that acted as a stop in the GBPUSD on the way up became a target for the market to run stops on the way down. You can see how treating the stop level dynamically allows you to adapt to a change in market condition.
Source: The Amazing Trader
Stops: Treat them as insurance
Stops should be viewed as an insurance policy,
This suggests your stop should be placed at a level that has a meaning to your trade (e.g. around an Amazing Trader line), not just based on how much you are willing to lose. In other words, a stop is like insurance. It should be placed at a level that keeps you in a trade when right and only gets triggered if your trade is not working out as expected or as catastrophic insurance to protect your position from an unexpected news event.
If you think of your stops as an insurance policy you will understand the logic behind using AT ladder lines as your stops in this trading strategy... source: AT Ladder Strategy Guide
Summary
I firmly believe that you need to protect your capital so you can live to trade another day. This means that each trade should have a stop associated with it. The key is not just placing a stop but how and at what level you set it. Your stop should not only fit your risk profile but as explained above placed at a level that you do not expect to be triggered.
If I was a reader of this article, I would ask the questions,
“How do you identify where to place your stop? How do you determine when a stop becomes dynamic and no longer acts as insurance?
The answer is it is a skill you can develop. My suggestion is to get access to the AT Ladder Strategy guide, which covers this in detail. It will speed up the process to develop a skill that took me many years to master.
Sign up for the AT Ladder Strategy Guide Black Friday special
Jay Meisler
Co-founder, global-view.com
[email protected]
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