by PeteB » Wed Jun 04, 2008 9:12 am
There are quire a few ways of using them
1) As a discipline substitute
You can use a stop if you have poor discipline, and fail to scratch or close out losing trades, 'hoping' price will revert and put you back in profit.
In this case you will have the stop close to your entry price, and you need to have done the maths / testing in advance to make sure that the number of times your stop is hit * the number of ticks is less than the number of times you hit your profit * your number of ticks profit.
Personally, I would prefer to work on my discipline, and exercise my own control on when to scratch or close out trades that aren't going right.
2) As a tool in judging successful entry
If you've identified a set up that gives a good probability of a profitable trade and you get your entry, you then need to assess whether what subsequently happens is in keeping with your trade plan or contrary to it. Sometimes the following action will confirm the set up, sometimes it won't. Your testing will have given you an idea of what the ratio between these is for a particular set up. If you know there is certain price action that says the setup isn't going to work out as planned, then being able to exit automatically and quickly is a good thing. A stop is one type of tool that could do this for you, but is maybe a bit clunky for this purpose. Where you place it will depend on your identified conditions that say the set up was wrong.
3) As an emergency protection device
What happens if you have to turn your back? A stop can exit for you if things are going wrong.
In this case you will have your stop quite a way from the price.
The big problem with this and betfair is that stops are set in the client software, not on the betfair server, and so they don't protect you from losing your internet connection, but may still be useful if you suddenly get called away from the screen.
4) As a means of locking in profits
A trailing stop can be used to keep increasing the amount of profit you have locked in on a big move, though it may exit you early on a pull-back where it might be more profitable to stay in.
(I'm sure there are more too!!)
As you've probably guessed from this, I don't use them - in particular setting a specific tick offset and specific stop loss would seem to be a very 'hopeful' approach to trading...