No initial stop loss.

The big advantage is that you are only closing trades with a profit. But of course you cannot allow losing all of your money or waiting 30 years to recover. So, you must use some kind of loss control. This could be money management distributing the money between different items, so that if one is completely lost it will be an acceptable loss compared to the whole of the portfolio. Or use a faraway stop loss, but limiting the loss in a trade to no more than an acceptable percentage of the whole portfolio.

For example: suppose I allow a loss of 50% in one item. I have €20.000 and I am trading 20 items. If there is a loss of 50% on one item, I am losing €500 or only 2.5% of the total portfolio value. You will have to make sure not to invest your money in items that behave the same! The end result here should be 80% winning trades and maximum 20% losing trades, but the loss on a losing trade is big. A large 50% stop loss will work best if you only trade in the direction of the long term trend.

A very close initial stop loss.

Contrary to using a faraway stop loss, you could use a stop as close as possible to the opening price based on technical analysis. Using stocks on a daily chart, this should be maximum around 7%. The advantage here is that you can have more losing trades that will be compensated by a smaller amount of winning trades. The number of trades will be much higher.

You will have to look for technical analysis buying signals that allow setting this kind of close stop, probably looking at hourly charts. If price moves in the winning direction, follow up the trade using a short term trailing stop method appropriate for that stock. The end result here could be two third losing trades and only one third winning trades, but the winning trades will bring in much more profit than the losing trades.

A “normal” initial stop loss.

Looking at a daily stock chart, depending on the typical volatility of a stock, this will be a stop in the order between 10 and 20%. Look for an opening on technical analysis basis with a previous support that does not exceed this stop level. Best you calculate the short term ATR (Average True Range) of the last 5 days and apply the same multiplication factor you would use for an ATR trailing stop for this specific stock. That will give you the best “normal” initial stop setting. The end result here will be around 50% winning and losing trades and the profit will be the larger profit on the winning trades compared to the losing trades. A good alternative instead of using a stop is buying at-the-money call or put options (minimum 6 months) with the amount of 10% to 20% you are willing to lose on a trade. That way you simulate having no stop on the stock with a risk limited to the value of the option contract and your otherwise normal stop.

 

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