Questionable Exits

Good Trades / Bad Trades

Money we are willing to risk - does not define the trade as good or bad

A stop - does not tell us the trade was good or bad. The Stop does not tell us if we were right or wrong. The only thing the stop is supposed to do - is assist us with the size of the loss. It’s there to ensure we do not lose more than we intended to risk before the trade began.

This part - is important. As you grow into trading you will come to realize that you can make money on a very bad trade or lose money on a really good trade; good and bad are not the question. At what point during the trade - did you realize you were wrong? That is not the same as using a stop at all.

For a lot of traders - the stop is a big looming question mark. Where should I put the stop? How big of a stop should I use? How small of a stop can I get away with?

For some people - they just choose a "dollar risk" value and that is the size of their stop. For others - the stop is determined by the candles and the setup.

Some traders use the anticipated price target to determine their stop size and other traders use a % of the account to determine stop size.

Trading is not "one size fits all" and for stops - using more than one approach is not uncommon at all. If you are unsure what stop size works for you - try paper trading the drills below.

Smallest Stop

The Smallest Stop drill is designed to improve your tape reading ability while also providing insight into the smallest stop possible for your current skill level.

Build a bracket order with 4t stops and trade that. Too easy? Lower it to 3t. Still too easy? Drop it to 2t. When you find yourself unable to trade without getting stopped out - you have found your stopping point (haha).

There is no magic to the 4t stop. It’s just a starting point that I gave you. If you try the 4t stop and after a week of practice you are still getting stopped out constantly - then maybe push it back to 6t and try that.

Just keep in mind that the stop - is not the problem (your entry is). You are either trying to trade the wrong direction (you should be long in a long market and short in a short market), you are entering at the worst possible moment, or you are trading in a “high volatility” time-zone.

The “Smallest Stop” drill is designed to assist you with using a smaller stop in your trading. If you are doing these drills correctly - then over time you will begin to realize where the stop is helpful and where it’s hurting you. You’ll get better at recognizing volatility - and perhaps will improve at reading the tape to time your entry “with the flow of orders” rather than against them .

Stop Drills

What is the average stop size for you? When trying to determine your sRR it is helpful to understand what your average stop size will be.

This is not something designed to tell you what stop to use - but instead is a tool designed to enlighten you - to educate you - to demonstrate what size of a stop you will need based on the types of trading you do.

If you have not yet started trading live - and are curious about the stop size that fits your current trading skill - then try a wild idea: no stop at all. I know … I know. You were told we ALWAY use a stop - and in live trading this is true.

But - if you trade without a stop - then you have to personally decide that the trade is wrong and exit the trade. Do this for a week and journal the trades taken. What was the size of the average loss? Better or worse than you imagined it would be?

Now that you have an idea about what a losing trade looks like - consider the stops again. Is the stop you want to use - smaller than the average losses you took in paper or greater than those trades? Look at the winners and examine the price move while you were in the trade… would you have won that trade if a tighter stop was used?

This goes to the heart of the issue. Most of us - are not willing to use a stop that is large enough to meet our consideration of “I am wrong and I need to get out.” Most of us - want to set a specific dollar limit to the loss and that is “I do not want to lose more than this much.”

2 point stop - wrong at +6 points

In the picture above - suppose a trader was trying to go short at 5630 with a 2 point stop? The previous high is 4 points above the entry and the tweezer pattern (farther left) has a pivot high that is 6 points above the entry.

The 2-point stop is not going to tell us if the trade is “right” or not. Price can go into 5432, 5434 and could even hit 5436 before finally falling… it could do all of that - and it wouldn’t be “wrong” - but with a 2-point stop we would not survive a move into 5434 or 5436.

Setup

To prepare for the Stop Drill we want to set the DOM on the workspace and build a bracket order which will apply the stop automatically when a trade is entered.

If you have a specific RR profit target in mind - you can add that to the bracket order as well. Now trade (on paper please) with this bracket order in different market times (globex premarket, RTH open, RTH morning, lunch, RTH afternoon, power hour, globex open and globex after hours).

Run trades with your stop and profit targets all day, or (better) all week. At the end of the week - gather all the data from these trades. How many trades did you take? How many were “full stop loss” trades and how many were “profit target met” trades? How many trades were scratch or you just bailed out of them before the stop or the profit trigger was hit?

Results

Look back at the results of the trading and calculate the hRR. Were you able to maintain your stop size and RR goals in these different market conditions? Why? Review the sort of market environment you were trading in. Was it during high volatility or low? Can you choose a different time zone to trade in?

If you changed the stop you used - which choice would you try next?

Consider

Consider the "average" and remember that RR goals are not LAWS to obey but are instead guidelines to keep you on the right path.

Chart Review

Looking back at the trades taken - did your stops end up in good locations? Are the stops in a "high traffic" area or are the stops located beyond the current price range / zone?

How many trades failed because the stop was too close? On those trades where you were stopped out - did you re-enter the trade? Why or why not?

With all these trades - did you notice when a smaller stop was acceptable and when a larger stop was needed? Did it make you reconsider the different trading times?

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