Monday, 1 November 2010

Dynamic Stop Losses and Trade Management

As traders, the only things we have control over in a trade is the entry and the exit. Everything else is up to the “they”. Whatever “they” want (not Lola wants) happens. It’s the trend.

OK, we have our first logical scale out point for our first scale out (or even an all out), but where is our stop loss? I have always said that I don’t use stops to exit. The market tells me when I am wrong and I exit. I have a drop dead stop out of the way of market action in case stuff happens.

Where and how I take my losses has a huge impact on my bottom line. Even a one tick better exit will put many thousands into my account or take many thousands less out of it.

My losing exits are based on my trade location. Let me say it again, my losing exits are based on my trade location. That means that the worse the trade location, the bigger my stop. This means that my loss per contract will vary. As I want to manage my risk in a consistent way, the worse the trade location, the larger the stop and the smaller my position.

I have a 100% base position, a set number of contracts for each market. This set number is different for each market but aligns the risk between markets so that my dollar risk at 100% is about the same in each market.

When I put on a trade I assess the risk based on trade location and context. It’s a very easy call to make and I do it in a blink. I classify my trade as a 100%, 50% or 25% trade and enter with the corresponding number of contracts. The other side of this is what I teach my students- that doubling down under very strict criteria is a very important tool to use. Again, the criteria for doubling down is based on trade location and context.

These numbers are dynamic: risk, trade size and stops. As soon as I change one, I must change the others.

Once I mastered these techniques, my bottom line increased substantially.


  1. Wow, that is complex; no wonder people don't make money at this! In your DVD series of the course you taught, do you give an indication of how to approach this problem?

  2. Gaery, you DON'T need to do this to make money, just to make MORE money. And YES, I did teach it and it's on the DVDs but that's not why I posted this. You are competing in trading against smart people who work hard. Smart is not a requirement necessarily but working hard and working smart is. And that can be learned.

  3. Hi EL,

    When you refer to "trade location," are you saying that we should trade inside-out from close to the 33EMA and outside-in from close to the Keltner?