E-Mini Trading: How to Set Your Stops Correctly

Published: 31st July 2011
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Setting stops that give you, as an e-mini trader, adequate protection against catastrophic loss and profit targets that maximize your return is an important step in your e-mini trading education. Needless to say, there is a wide variety of opinion on methodology on this topic. To be sure, there are even traders who trade without stops. Trading without stops is a risky and unnecessarily dangerous approach to trading.

Some of the stop loss methodologies (and profit target methodologies) generally are based on an indicator or a particular chart formation. They may include:

• Support and resistance lines bracketing the entry price...

• A fixed distance based upon the Average True Range

• A distance equal to 2 standard deviations from the Bollinger bands.

• A standard distance the e-mini trader always uses, regardless of circumstance.

• A distance based upon previous swing highs than swing lows.

Whatever your methodology, it's important to use a well tested and sound system. Personally, I like to utilize the Average True Range and a multiple of that range to set my stops. By using this particular system, I can set a reasonable stop loss based upon the actual range of the previous bars and feel confident that I have given myself ample room for the trade to develop.

It's not uncommon to see individual’s trade very tight stops, with limited success. Of course, many Internet e-mini trading educators claim they trade only very tight stops in their advertising; but a casual visit to many of these educators trading rooms shows otherwise. It is not reasonable to expect your trade to move in a straight line and in the direction of your trade each time you place a trade. Retracement inside each bar is common and it is very easy to get stopped out on a simple retracement when you have your stops it exceedingly tight. In short, tight stops are a good way to part with your hard earned cash. Though trading with tight stops assures you'll never have a major loss, the random movement of the market will often take you out of your trade before it can develop properly.

I suppose I could be accused of setting excessively wide stops, especially during periods of volatility. There have been a number of widely publicized studies (Murphy, et al) that has shown definitively that the wider stops you can tolerate the greater your chance for profitable trading. It's not uncommon for me to trade 15-20 point stops, which I call an emergency stop. I also set a mental stop at an intermediate level in these wide stops where I make a decision as to whether I am in a simple retracement or simply gotten the trade wrong. If the trade is a bad trade, I use my mental stop and exit the trade. In short, I prefer wide stops to tight stops.

In summary, I have mentioned a number of methods for developing a methodology for establishing stop/loss points and profit targets. I have stated my disdain for tight stops because they often result in a premature exit from a potentially profitable trade. Further, I have stated by proclivity for wide stops because of the greater potential for profit.

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