GOAT STOPS . . . .
The most common question I get is how to place stops . . . what I am about to outline here will likely change the way you trade . . . forever . . . especially if you are losing year after year trading markets . . . while faithfully using stops to preserve capital.
First, being right is really not very important in successful trading. . . if you have ears to hear . . . you should now have this ingrained in that thick matter behind your ears . . . and if you don’t understand this then you need to go back and study the other articles I have written why this is so. . . and read The Art of Execution. . . because you’re not ready for this article. . .
Stopping loses is essential for success in trading. . . because you will be wrong 30–70% of time depending on your trading skills. Preserving capital is the purpose of Trading Rules 1 through 4 . . . Money Management.
I am constantly amazed at no matter how much I emphasize this, most traders just don’t get it. . . and it seems the longer a person has been trading unsuccessfully. . . the more they prioritize being right! If being right is your priority in trading you need to not trade! . . . stick to hodling and hodling alone!
Second, if you find yourself taking a position and constantly getting stopped out there is a 99.9% chance that you are over trading (trading for trading’s sake) or you are over leveraged. I can’t help you if you are addicted to trading for trading’s sake . . . but this tidbit will correct a bad habit of over leveraging . . . forever.
And here it is . . . when you enter a trade enter with only one-half of your initial position . . . and rather than placing a stop . . . double down where you would normally place your stop. . . that’s right. . . enter with a smaller initial position . . . and double down where you would normally place your stop.
There are a variety of ways to do this. . . by scaling in a position . . . rather than a simple double down. . . but hopefully you now understand this simple principle.
If you start using the principle taught above, it will correct the problem of constantly getting stopped out due to over leveraging. Also, notice how it ties in with the unimportance of being right! You are probably wrong at entry point A but you just might be right at entry point B (or B,C,D and E if you scale in your entry).
Third, there is no magic place to put stops . . . you may read various theories proclaiming otherwise . . . but I have found that placement of stops should be determined by one factor . . . and one factor alone . . . the amount of equity you are willing to lose . . . which should never exceed 5% of your hodlings.
There are a few finer points. . . for example if you follow basis and favor purchases and sells of bitcoin depending on the backwardation and contango, you want to use stops in the perp contract where there is substantially more liquidity than the futures. . . and then exit by unwinding the spread as things settle down.
Another useful tool is using a stop limit order rather than a stop . . . the risk is a market can blow through your stop without a fill but this avoids getting clobbered on a spike. . . a trade off that is not perfect . . . that works 95% of the time . . . until it doesn’t.
Finally, stops are most important on the initial entry of a position which this article addresses. Once you are in winning position, trimming replaces stops because your stops are so far away from the market they are likely irrelevant until you approach that blow off top or exhaustion bottom.
The second most important time for stops is at the blow-off tops (when long) and exhaustion bottoms (when short) . . . to limit how much profit is given back . . . but this will to be addressed on another day . . .
Hope this helps.
UOG
