Different types of stops


Stops are always a favorite topic for discussion in trading circles. Here’s a recent question that came up from my mailing list.

One question which I think is important in this volatile market is to develop a tool box of stops to accommodate different trading Scenarios. Example: A capital protection stop in the early part of the trade then a break even stop and finally a succession of stops to protect your profit. Please could you elaborate on this subject.

For me a stop is an exit order. Exits are defined by one’s trading methodology. Where your system tells you to put your stop is where you should put it. I am not one who thinks in terms of “stop loss”. Rather I look at it from the perspective of the price level which tells me the trade is probably not going to work out the way I’d expected – or in the case of trailing stops, the underlying basis of the position is no longer in place.

Now, having said that, there are trading systems (like moving average cross-overs, for example) which do not employ stops or pre-designated specific exit levels. In that case, I can understand the use of a “stop loss” to prevent an extreme market event from blowing out your account. Aside from that, though, the exit you use should be whatever is defined by the system.

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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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  • Dboy

    1) the term “stop loss” is no longer used in the brokerage business. The term implied that it was a way to guarantee the prevention of a loss, which is of course not true (opening gaps, etc). “Stop-loss” is no longer a NASD-legal term.

    2) moving average crossovers are NOT a system, and it appears that you have no idea what systems are.

    3) a stop that is used to protect against a severe market event is generally known as a money-management stop.

    4) if you are going to bother to write an intro to stops, it might be good to define what they are, how they might be used, the different types of stops, etc. End result is that this page is completely useless.

    dboy

    • http://www.theessentialsoftrading.com John

      Dboy – Don’t know what bee got in your bonnet, but:

      1) I argued against the idea of “stop-loss”, not for it. And note that I said “idea” because that was the basis if the question asked, not formal industry terminology (terminology that I find most individual traders either don’t know or don’t care about in any case).
      2) This is not a discussion of systems, so on what basis can you draw any conclusions about my knowledge of systems? The moving average cross-over example was meant to indicate that some systems are not condusive to the use of stops in the standard fashion because they employ an exit-and-reverse strategy.
      3) The term used by the questioner was “capital protection”, which is the same as your “money-management”.
      4) This was never meant to be “an intro to stops”, but as the first setence indicates, an answer to a question asked – full stop, nothing more.