Stop loss and gap direction (2x Q’s)

[Robbie Williams 12]

Hi everyone, I had two questions today.

 

The first was related to the direction of a gap. If a stock either gaps up or down, is there a tendency for that stock to then continue the gap or receed back and “fill the gap”. What I mean is, is there a higher probability of one over the other over the course of the day so that we can try and “trade with the trend” or do we solely trade based on price action at the time?

 

The second question is related to the stop. I feel like this is holding me back in my trading. As soon as the price action reaches my stop, even if all the signals show the trade is going in my direction and the price shoots up momentarily, I get out and then the 1 minute candle will close back above or below that stop. I’m curious as to what some of you do; do wait for the candle to close past the stop or, as soon as the price action reaches your stop do you get out?

[Robert H 455]

Robbie, these are my opinions which directly affect how I trade.

 

I have zero bias towards a stock going in any direction during the pre-market--I always trade the price action. I've realized that I can't even predict what will happen 5 seconds from now, let alone 5 minutes for now. For that reason, I am never long or short bias. Many times I've seen gappers continue their trends, but have also seen them close the gap (Red-to-Green/Green-to--Red). So for that reason I always say 'price action is king.' I know that John F. Carter has some stats on the probability of the market closing the gap on certain days (in his book Mastering the Trade). However, I believe this relates to Futures and the index as a whole.

 

As for stopping out, I do so as soon as the price reaches my level. I've found that when I wait for the 1-minute candle to close, I end up holding even longer in hopes of the price coming back. This momentary indecision messes up my psychology and makes me even more hesitant. For that reason, I hit the hotkey immediately. I believe doing so has helped me build up the reflexes to stop out better.

 

I know Andrew sometimes waits for the 1-minute candle to close. He mentions so in this post. On many occasions I've seen him exit before that, though. For example, during a huge dump or volatile move.

 

Those are my two cents.

[Robbie Williams 12]

Thanks Robert for the reply.

 

I guess it all comes down the experience but I have found some stocks that will shoot/spike straight through my stop loss so I’ll get out even worse than my stop loss only for it to come straight back down a split second later. I normally see this in the first 5-10 minutes of market open due to the volatility.

 

 

[Robert H 455]

That's why a lot of traders are apprehensive of the first 5 minutes :)

 

How tight are your stops normally?

[GordonDK 6]

I've started using hard stops. At the moment I am restricting myself to trading only ORB and VWAP, and I typically use a stop of 20c either way (long or short). Tried using 10c a couple of times, but this is too tight and I ended up getting stopped out when I shouldn't (should probably only use such a tight stop if you are scalping). Using hard stops has taken the edge off psychologically. I know that Andrew does not use hard stops, but I have seen other experienced traders recommend using hard stops in the beginning. Has helped me so far to the extent that I have broken my negative P&L spiral. Now, when I lose a trade (which we all will) I can ensure that I do not exceed my intended stop loss, and then move on to the next trade or the next trading day.

[Robbie Williams 12]

I don’t use hard stops but I draw 2x horizontal lines on my 1 minute chart as soon as I’ve placed my trade - one for my stop loss and the other for my profit.

 

 

 

My stop is normally just a number like 10 cents or 20 cents but I’ve read all the trades in your journal Robert and I like how you will define a stop based on a technical level most of the time rather than just an arbitrary number.

 

 

 

Also, say I set a 10 cent stop, I I’ll just wait for the stock to move either up or down 20cents, (a 2:1 profit target) and then take my winnings, however what I think what I should be doing is actually taking my profit at a technical level.

 

 

 

I’d be interested to see what people do, whether they:

 

A) Take all their profit once a 2:1 ratio is reached

 

B) Take some profit once a 2:1 ratio is reached and the rest when the stock has moved to a technical level

 

C) Always take profit at a technical level, making sure that there is at least a 2:1 ratio BEFORE entering the trade.

[Robert H 455]

As Andrew discusses in Class 4, stops and targets should be based on technical levels. That's why we go through the trouble identifying those in pre-market (Class 3)!

 

0.10 is really tight for most stocks. For some it could be the hit you take on the spread and slippage. The price testing a technical level confirms what the price action is really doing during the random movements. Plus, other traders are watching these levels so they become a self-fulfilling prophecy.

 

As I've mentioned, I scale out 1/3 of remaining position at a time. I usually take the first off after a 0.30 move. Depending on price action, I'll actively manage the exits with the ultimate goal being my original target. Sometimes I keep the last 10-20% until it tests my break-even.

 

And yes, make sure you have a favourable risk to reward before going into the trade. All the best!

[Robbie Williams 12]

Thanks again for your wisdom Robert. :)

 

I'm finding it very difficult to find trades that are a 2:1 profit ratio or greater but I'll keep working on it. My main problems are that my losses are always bigger than my losers for a number of reasons:

 

1) if the stock moves in my direction, I will wait for a least my 2:1 profit target to book some profit even if I'm 1 cent away (like yesterday) and then made a loss

 

2) Sometimes the stock will skyrocket through my stop so I'll actually get stopped out 10 or 20 cents more than my original stop loss

 

3) Sometimes the stock will start moving in my direction so I'll take some profit off the table but then when I place my stop at breakeven OR notice that the trade isn't going in my direction I'll get out so that my winners are always going to be smaller than a loser going right to the stop.

 

 

 

Knowing exactly what my problem is and still having issues is driving me insane but will continue working on it!

 

 

 

Think I'm going to use a hard stop to limit the price spiking though my stop which as discussed before is a horizontal line drawn on my chart.

 

 

[GordonDK 6]

Hi Robbie,

 

Andrew has a video on setting up hot keys for hard stops. I’ve set up these keys for both long and short trades with stops at -0.1c to -0.5c below avgcost for long trades and +0.1c to +0.5c for short trades. Makes it very easy and quick to implement hard stops right after entering trades. I’m only trading 1 stock at a time, so after I have scaled completely out of a trade, I then use shift+escape to cancel the stop order (otherwise you will get filled for a new trade if your hard stop gets hit). This has completely transformed my trading allowing me to concentrate on maximising my profits instead of concentrating on limiting my losses on trades. For the past 3 weeks I have made consistent (though modest) profits! You have to be careful not to trade low float stocks with extreme price spikes. Otherwise your hard stop (which would be a stop market order) could get exceeded/run through by price spiking/“extreme” slippage. I would agree with Robert on a minimum stop loss of 0.2c above or below avgcost - unless you’re scalping.

 

 

 

Br.,

 

 

 

Jimmy (Gordon in the chat)