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Stops and exit and a setup

Thursday, March 14, 2019 6:47

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Stops and exit are inherent to a setup

There can not be a stop or exit strategy independent of a setup.

They are inherent to your setup.

So if you have a problem of setting stop or exit you have setup problem.

For swing trading stops and exit are based on your swing trade setup.

If you are say buying support and selling at resistance , your stop will be violation of support for long postilion. Your exit will be near resistance.

For momentum burst kind setup stop at low of entry day is logical as any revisit to low of the day tells you the momentum burst failed.

For more aggressive momentum burst traders a stop even higher than low of day is workable.

Same way exiting before momentum fades are reverses is integral part of the setup. You are not entering that setup for long term hold.

Some swing trading setups like mean reversion or pullback buy setups do not use stops as the setup becomes even more attractive as it further pullback.

But then those people control risk using position sizing .

In essence for them size of position itself is a stop. And there exits are also time dependent or ATR based.

Stops for long term setup depend again on your setup. If using trend following setup then logical stop and exit is if the trend changes.

Trend followers typically give lot of room for their trades to run as few big trades in a year make their returns.

Many trend followers use faster trend definition to put stop as trade moves in their direction. So if entry is on say break above 50MA , then stop is breakdown below 50 MA.

Once the trade start to work they move stop to say 25MA and as it further progresses to 20 MA and 10 MA and so on to protect open profit, so they exit once stop gets hit. That way they can stay in trends for longer duration.

If your setup is valuation based then obviously if stock goes down valuation is even better, so they do not use stops. But again position size becomes stop for them. Exit for them is based on valuation reaching their goal or becoming stretched.

In short unless you have well defined long term setup, there is no general stop or exit rule.

Think through your total setup or strategy before just thinking of exit.

stops are inherent to set up.

What is your stops and exit strategy

Source: http://stockbee.blogspot.com/2019/03/stops-and-exit-and-setup.html

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