BearTrader

Hi all - I need help developing a strategy for moving my initial stop to breakeven.

In the perfect world, your initial buy entry point is the same thing as your breakeven.

Having said that, when I am long a stock, I would never move my initial stop up to my initial buy entry point as I might be stopped out too quickly. I no like that.

So let's assume my initial stop is $19.50 and my initial buy entry is $20.

Now here is what I do - I calculate the distance between my initial stop and buy entry point ($20 buy entry - $19.50 stop = .50 cents) and I then add .50 cents to my initial buy entry point ($20 + .50 cents = $20.50) to create my new breakeven TRIGGER point - $20.50.

In this example, as soon as my stock reaches $20.50, I move my orig stop ($19.50) up to my initial buy entry point ($20). My thinking is that the stock can now (in the worst case scenario) retrace .50 cents back to $20 (both my initial buy entry and my new stop) and if it hits $20, I won't lose money. I'll break even.

BUT...If I wait for the stock to trade all the way up to $20.50, sometimes the trade goes against me. For example, say the stock only trades up to $20.45 and then retraces all the way back down to $19.50 quickly - in that case my system fails, and I'm stopped out for a loss - which sucks.

Should I be more aggressive about determining my Breakeven TRIGGER? Maybe instead of basing my trigger on a .50 cent difference, I could have instead used a .25 cent difference (and thus a new breakeven TRIGGER point of $20.25), in which case I would have avoided the unnecessary loss mentioned above?

I realize breakeven triggers are often determined by each stock's volatility - such as the ATR - or support and resistance points.

In the end, I would just like to hear how other traders define

a) breakeven (what exactly is breakeven to you? - just covering your commission fees?)

b) how they determine their breakeven TRIGGER point to spring into action and move their stops up.

I can't really find any information on-line about establishing breakeven triggers - that's odd, no?

I am not familiar yet with pips and forex (newbie alert), so it would be helpful to limit your examples to stock trading. Thanks and I really look forward to your feedback.

Thank

 

Simit Patel

hi beartrader,

personally, i try to stay away from fixed formulas, and prefer instead to move to breakeven based on the price action of the stock in question.

here's a chart that illustrates some of my thinking.



i've highlighted an area that shows where buyers may have stepped in based on signs of a technical reversal. so say you got in at those levels, where the candlesticks signaled the reversal. personally, i would wait for price to touch or clear the next resistance level before moving to break even (or, if i was in it for the short-term, i would exit at resistance).

that is of course just my personal preference. i think it is important, though, to consider your target risk/reward, the timeframe you are trading in, and your whole plan in general when considering your plan to move to breakeven.

this is a big subject, and a very important one. it took me years to feel comfortable with managing the process of moving to breakeven -- i'd say it was one of the hardest parts of trading for me personally (aside from all the psychological issues ).

our risk management section may be worth checking out: Risk Management - InformedTrades

as well as our section on stop loss orders: Stop Loss Orders - InformedTrades

Thank

 

BearTrader

Its great to read everyone's ideas and then synthesize my own plan. Keep em comin!

Thank

 

BearTrader

Splitting hairs, but then again this is tricky stuff.

So, referring back to your chart, say like you've reached the 200 EMA target at about $3.50 and you'd like to stay in the trade for a possible even higher target.

Now you've moved you initial stop loss up to your entry point (about $2.50) *but* might you also move your initial stop loss up to about $2.90 to lock in some small gain should the stock retrace?

How do you generally handle this situation? It sounds like you personally exit at resistance at the 200 EMA in this case and are pleased with your gain. Or maybe I could take 1/2 my position off the table at the 200 EMA and then move my stop all the way up to $2.90 to see what transpires?

I guess I would want to look at the stock's ATR on the day I hit the 200 EMA at $3.50 and use 1XATR do determine my new stop? Seems like breakeven just went out the window.....

Thank

 

Simit Patel

well, generally, i want to have an idea of what my win rate is and what my risk/reward is. personally, my strategy generally requires a win rate of 35% (of course the more the better ) and so i look for a risk/reward of at least 1:3. so the first question i'll ask is how much did i risk on the initial trade? i don't try to lock-in profit until my risk/reward has been satisfied.

that is, of course, not to say that this is the only approach -- it's simply what's worked best for me. some may wish to trail up more and lock in profits along the way. i know that my strategy requires getting big wins, though, so i'm not that interested in locking in small profits. i am interested in moving to breakeven when it seems safe to do so to protect risk, though.

Thank

 

Tekmnd

Hi BT

There is a tool called the average true range (ATR) that can really aid in stops and maybe some use for what you are attempting.

Basically it shows the average that the price goes up and down for that time frame (so if it is on a 15 min chart, it shows how much on average price goes up and down each 15 min). You can throw a SMA over the top of it and get an overall price range that price moves. You can then make your stop loss a percent of the ATR (1 ATR, 2 ATR, 1/2 ATR- your choice).

This might work better than simply always using a set amount like 50 cents, because stocks have different levels of volatility and what you want is a stop to protect your assets (tight enough to keep you from losing too much), but not so tight that you get stopped out from noise (general price moving up and down).

Cheers
Tek

__________________

Thank

 

BearTrader

Hey Tek - great SMA overlay suggestion - I already use the ATR on the daily chart and generally set my stops somewheres between the - 1 and -2 ATR in a long position. But I do have an additional question for you - If I am using a 10 period ATR, should I also set the SMA overlay to 10? And I notice (on stockcharts dot com) that the ATR (10) is, for example, $1.07 but the SMA (10) overlay value is $1.13 - so it's probably a better idea to go with the SMA (10) figure, correct? By the way, I'm a swing trader here - is ATR (10) to short a look back period in your opinion? Some folks like 14 or even 20......

Thank