Placing Initial Stops

[cpatte7372]

Hello,

There is a book called "Tools and Tactics for the Master Trader" by Oliver Velez. There is a passage where he gives advice on placing initial stops. The following is an excerpt where he attempts to describe what is called the "Current Bar Stop Method" as opposed to the "Prior Bar Stop Method"

ABC, Inc., traded on Wednesday between a high of $40(1/2) and a low of $38(1/2), a $2 range. On Thursday, the master trader buys ABC, Inc., at $40(9/16) (1/16 of a point above Wednesday's high). Once the purchase of ABC is complete, the master trader, using the "current bar stop method", would place an initial stop at $39(7/16).

This is really puzzling me, because how would you know where to place a stop until the price bar has been completed?

I really hope I'm making myself clear. I think what I'm trying to say is that there really can be no such thing as a "current bar stop method" because you wouldn't know where to place the stop until the price bar is complete. I must be wrong because its in a book, right? But it just doesn't make sense to me. Its driving me a little batty trying to figure it out.

If some of you have the book, the passage is on page 307. I know Fibbgann has the book and I think Linus has it but I would truly appreciate comments from others.

Cheers

Carlton

[AllenCook]

I have read the book (a long time ago) but can't seem to find it now but will take a stab anyway. I would guess that they are referring to placing a stop below the existing low at the time of the trade (intraday). This is probably as an alternative to the prior bar stop method because using the prior bar may cause the stop to be too far away (too much risk).

Using the current bar method would probably cause you to stop out more often (since it is smaller) but would then result in smaller losses. The prior bar method would give you more room but may be too unacceptable because of its size.

You would probably want to be more careful in the current bar method. For example, if the stock gapped up (assuming a long entry) you may want to either scratch the trade or wait until a range is set. Or you can decide a more reasonable stop range such as just below the midway point of the prior bar (if below the low is too far away).

Food for thought!

[cpatte7372]

Hey AllenCook,

Oh, I see.

You're good. Thats almost verbatim to what was said in the book.

Wow! Thats how simple it was.

Thanks again mate.

You're making me look a bit silly

Cheers

Carlton

[KingCAMBO]

Carlton,

Why not just consider and adhere to a maximum dollar or percentage stop as was outlined in: THE TRADING PLAN

This will not only keep you honest, it will force discipline. Just adjust the numbers and %'s for the vehicle you want to trade. The principles of money and risk management remain the same.

FWIW,
KingCAMBO

[cpatte7372]

KingCAMBO

I have been meaning to talk to you about the trading plan. I printed it out over the weekend and I have been studying it. I guess by now you realise that I'm newbie and I'm having trouble trying to convert the plan to stocks.

I really do believe that I will be using it to form the basis of my future trading. However, unless you can help me equate the plan to stocks I think I will have trouble understanding it. I have been reading a little bit of it each day.

Cheers.

Carlton

[KingCAMBO]

The only difference between futures and stocks is going to be "leverage". By that I mean how you divide your margin to cash ratio. The principles are uniform across any type of trading vehicle. It is about money and risk management, not an argument to trade ES as opposed to BRCM or whatever.

See the books by Ryan Jones and Van K. Tharp that I cited in previous posts.

And best of luck in your quest!
KingCAMBO

[cpatte7372]

KingCAMBO

Thats cool. Gonna continue to review the plan. Will check out the book.

Thanks again mate.

Carlton