January 7, 2008
A Half-assed Idea about How to Aggressively Trail a Stop
Commenter Bob asks the very good question of how to handle stop management when a stock moves quickly and dramatically in our favor. Logitech is the position that sparked the question, and here’s the original idea sent to list members for last Wednesday:
Short LOGI below 36.57
Protective Stop above 37.20
Initial Risk = 0.63 (1.72%)
Initial Risk covered at ~35.94 (if prices reaches this level, move stop to breakeven)
Target: 32.57 to 32.04
As you can see from the chart below, the trade would have triggered and filled on Wednesday. It also traded down to 1x our initial risk which is the level that makes us move our initial protective stop down to breakeven. The stock traded sideways on Thursday and didn’t hit the lowered stop around 36.57.
On Friday all hell broke loose as the stock tanked to over 4x our initial risk in a single session. Following the guidance of the ABC (”Arbitrary But Consistent”) Stop Management method, since 2x our initial risk is covered, we start to trail the stop above the high of the daily “down” bars. But is that aggressive enough considering the distance this dog collapsed in one day? For record-keeping purposes, I will follow the ABC method, but let’s consider another possible stop-trailing method using Market Profile.
Market Profile, or volume (and time) at price, is a handy way to see at what price (and time) the bulk of the trading volume happened. See that bulge in the graph below just below 34.53? You could say to yourself, if I’m going to trail this stop down aggressively and I’m looking for a spot to put it, somewhere a bit above 34.50 might not be a bad idea. You’d be locking in over 3x your initial risk and might feel better about things. What do you guys think?
January 7th, 2008 at 11:15 pm
Wow, thanks for that analysis. Me, I just tried to find some place that might act as resistance by looking at the 3 min. chart and set my stop at $34.81 on Friday. After watching today’s open for 30 minutes, I moved my stop to $33.96 (Friday’s close). Does that qualify as half-assed?
January 8th, 2008 at 2:09 am
hhmmm…i dont know, but trailing a stop on the high or low of the previous day seems not a good idea to me…too many days, where they push it a bit above or below the previous days low or high, only to see the market reverse quickly afterwards ? if i had a trade that moved 4 or 5 or more times the initial risk, i would just keep a b/e stop and hope for the market to go and never look back…(probably just a daytraders daydreaming) (-:
January 8th, 2008 at 3:19 am
Speaking of LOGI, earnings are scheduled for 16-Jan-08 after market close. I have an aversion to holding stocks into their earnings.
January 8th, 2008 at 3:34 am
i myself would advocate a CTC trade management (”case to case” trade management)… (-:
January 8th, 2008 at 5:13 am
@bob: Given today’s gap-down drop, ABC would put the stop above 33.44, which is tighter than Friday’s close.
@peter: Yes, there’s nothing wrong with living the “loose” B/E stop but this thing has already hit the target which demands that you think about booking profits. I too believe in CTC trade management but for the purposes of building a trading record for the box I had to come up with ABC.
@stevegee: I didn’t know that and never pay attention to earnings believing that price already discounted them (naive maybe). Anyway, the 16th is a way away and I expect the trailing stop will take people out of the trade before then.
January 8th, 2008 at 6:01 am
Chairman: Thanks. I was having trouble with the stop placement since LOGI was dropping so quickly. Anyway, I sold my small put position today at $32.47. I figured since it hit the first target that I wasn’t going to push it. Do you have a time period in mind for which these box trades should last? I am looking at them like swing trades: two weeks or less. What do you think?
January 8th, 2008 at 6:54 am
Bob: Glad you caught it and made a few dollars, some of which I expect you will kick back to me in time. :-) Yes, it seems like the trades stop out very fast when they’re bad, and when they work out it takes a couple weeks usually.
January 10th, 2008 at 3:22 am
hi,i have a confusion about short trade(logi),at 28 dec it gapped up it seems like it broke the resistance,but u traded just after that,can u please tell how to understand or trade this kind of trade,ur blog is best educational blog ever.ty.
January 10th, 2008 at 6:59 am
shohel: I can’t tell you the details, but it’s important to realize that the daily bar on the 31st was an inside bar and we were only interested in shorting if price fell below the low of that bar, i.e. if price reversed. Hope that helps?