Objective Ways to Set Your Stops

06/17/2013 10:00 am EST


Pratik Patel

Founder, Clear View Futures and The Futures Room

You know you should set stop losses on all your trades, but where? Professional E-Mini trader Pratik Patel shows you how he does it.

To manage your risk as a trader, you've probably heard that stops are a good idea. But a loose stop versus a tight stop, how do you know where to set it and what's that look like?  Our guest today is Pratik Patel to talk about how he does that.  So Pratik, first of all, how do you set stops in terms of is it a specific dollar amount or a technical level, what do you like?

Sure.  Well, I'm a tech trader.  I'm a trend trader.  So I'm going to wait for certain things to develop first. If I'm looking for an uptrend, I want for those higher highs to be established, the higher lows. So I'm looking for the trends or a pattern.

Once I establish a setup that I like that's going according to my criteria, I'm going to put in my entry order and I'm going to put my stop.  I place my stops at technical levels. It could be a double bottom, triple bottom, a trend line support and resistance, and I keep my stops one or two ticks below a major technical point.  The reason being, what I've seen in my experience of being a tech trader for the past eight years is the markets respect technical analysis. 

So let's say, you know, a lot of people like to use a tight stop or I only want to risk $100 or $200, but they are basing that risk on their notational value that they can handle.  They are not respecting what the market is showing. So maybe the market says okay, well the risk in this trade may be about $400 based off of technical analysis. So what I've seen happen before is that people will put what they can handle as a monetary stop, and then they'll stop out, but then they'll see it bounce off of some of these technicals.

And that's also the reason why I keep my stops one or two ticks below a major price point. Because sometimes you'll see those double bottoms keep bouncing off those levels, and if you keep that super-tight stop you might get stopped out, and then us traders get into the emotions and can't get back in the trade.  So I use technical price action and see what previously happened in the market, and then try to project what's going to happen in the future. 

Also, when you use loose stops I also look at technicals and say okay if this stops at this place and this is the risk I can handle, then I'll put that trade on.  I'm not going to leave a super-loose stop and let it ride.  It's going to be in technicals and also dollar amount.  But it's not going to be purely I can only handle a $50 drawdown and I'm out of the market.

So if I can't handle to wait for it to come down to a 200-day moving average, the idea is not to take the trade rather than try to put the stop further within what your risk management says.

Exactly.  And also, one thing about trading is if you feel like you're going to miss an opportunity, never feel that, because there's always going to be another opportunity.  If you missed it today or if you missed this one hour, I can assure you tomorrow's a new trading day. You're going to find another opportunity, and so it has to do with a lot of patience, you know.  Sometimes you keep that stop, and you have to wait and see if it's going to bounce off those levels or not. 

Alright, Pratik, thanks for your time. 

Thank you, Tim.

Related Articles on STRATEGIES