Placing a stop 1 tick below support and 1 tick above resistance - Aussie Stock Forums

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  1. #1

    Default Placing a stop 1 tick below support and 1 tick above resistance

    You hear a lot about this in books, forums etc. I was read the book "The New Sell and Sell Short" by Alexander Elder and he shared these thoughts.

    Do people agree? and how do you place your stops in accordance with this?

    • Among the many misconceptions about stops one stands out as the worst. It has cost investors and traders billions of dollars and will, undoubtedly, cost them more. This misconception is that one should place stops on long positions immediately below the latest low. This idea has been around for so long that it has acquired the look and feel of received truth. It became popular because it is so simple, feels comfortable, and does not require much thought. Even I took this advice early in my trading career and passed it on to others—until, as so often happens, reality hit me on the head. There is one major problem with placing a stop immediately below the latest low—it very likely will lose money. The trouble with such stops is that markets very often trace out double bottoms, with the second bottom slightly lower than the first. I could fill a book with charts showing this pattern. The level immediately below the latest low is where amateurs cut and run and where professionals tend to buy. Whenever prices approach a bottom area, I become very alert to the possibility that they could penetrate to a lower low. If prices fall to a new low, while the indicators fall to a more shallow low, creating a bullish divergence, I wait for prices to rally slightly. When they rise above the level of the first bottom, they flash a buy signal. I consider this one of the strongest and most reliable trading signals—a double bottom with a bullish divergence, with the second bottom slightly deeper than the first.

    • Below the lowest low is where beginners usually cut and run but professionals go shopping there (pg. 104).

    • Looking at most charts, you can make a fairly good guess about where careless traders would place their stops. When crowd members use stops, they tend to place them at very obvious levels. They slap them immediately below support when long or immediately above resistance when short. Since the crowds lose on balance in the financial markets, it pays to do things differently from the majority. Here and in the next few chapters we will discuss several alternatives to those obvious levels (pg. 109).

    • To add insult to injury, I noticed that when I placed my stops the usual way, one tick below the latest low, it exposed me to a great deal of slippage. A stock would decline to the level where my stop had been set, but when I received my confirmation, the fill would be several ticks lower. My broker explained that there were so many stops at my level that when the stock hit it, it just went flying. With all those sell orders, including my own, flooding the market, the buyers were momentarily overwhelmed. What could I do about it? The pain of losing provided plenty of motivation. I decided to tighten my stops and began placing them not one tick below the latest low, but at the actual low level (pg. 109). I realized that the level of the previous low was where the pros rejigged their positions. The action was tight, and there was very little slippage there. Once the stock fell a tick below its previous low, it was in public stops territory, and the slippage became hot and heavy. With that discovery, I stopped placing my stops a tick below the recent low. I began placing them at the exact level of the previous low—and my slippage on stops drastically diminished. I used that method for many years—until I switched to an even tighter method of placing stops (pg. 110).

  2. #2

    Default Re: Placing a stop 1 tick below support and 1 tick above resistance

    Pretty true of any trader who has used pivots.

    Personally I set them at 1 tick below for the initial trade.
    If the trade moves 3 or more ticks by close Ill go to B/E.
    If a trade is on its way and stop is at B/E and the stock has a down day I will raise the stop to the closest low and keep doing so until it turns or stops.

    If your EOD trading just close the position if the close is below the pivot--NEXT DAY.
    Even if the stock opens above the pivot.

    Thats my methods anyway.

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