How to Trend Follow with Protective stops
I want to share an email exchange I had with a trader seeking the answer how to place his stops…I am sure all of you reading Trend Following Mentor Blog will benefit from this…
During a previous conversation, you mentioned that you removed yourself from DDD on the day it had its 11% drawdown. This led me to believe that you use some sort of intraday stop, such as 2% below previous days close. If you would have waited till it closed below your TTT, you would have gotten out the following day. Do you believe in using an intraday stop to prevent large moves against you during the day? I was in TGH today, which is an example that is similar to DDD. If I was using your TTT, I would have been in all today and exited tomorrow.
I run various models……I have one that trades on open…as well as others that have trailing stops…if they are hit intraday …that happens….There is nothing perfect. There will be times…TTT would have hit your trailing stop but not activated because it touched it and bounced….You just need to be consistent…risk an amount that for any trade you do not care about the loss. Otherwise you will find it hard to be consistent… For example I am risking .5 basis points..so on any trade for one model…I am willing to lose $500. I accept this ahead of time that I can and will lose this…and at times more…
There is no way to avoid big fluctations…for example yesterday I had an open order for KORS..it gapped up huge…and was a bigger risk than I was happy with…but that is life..
I hope this helps.
The reality is you can not avoid Losses…Trying to avoid losses will only cause bigger losses. The key is to only risk to your sleep level. Risk to a point that any trade does not cause you any mental anguish. Just put them on as per your trading plan. There is no need to even watch the screen after you have placed your trades and have your stops in place. They will do whatever they want. You can not wish the shares to go any higher. Do not waste your energy. Focus your energy on having a complete trading plan….
What to buy..or sell
How much to buy or sell
When to get out with a profit or a loss….
This is it…The rest of it is simply probabilities. You must have a robust trading plan with positive expectancy using position sizing.
Past Performance is not indicative of future performance