Risk Management — Stop Losses

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jesse
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Risk Management — Stop Losses

Post by jesse »

Your stop loss is perhaps the most important part of your trade. This is the level that you commit to sell at no matter what, but you also commit not to sell until the price gets to this level.

Although you can use hard stops with emasar, I prefer to use soft stops and not exit the trade until the signal occurs, usually when the 50 ema enters the Ocean. When trading the 4h chart there will be many times when price is on the Beach or in the Ocean and the last thing you will want to do is buy more, instead you want to get out while you still can. You must resist this inclination at all costs, fill your planned orders and hold your position until you are fully stopped out. Likewise There will always be another level of support at or directly below your stop loss. You must ignore this and close your position or set a hard stop underneath the local low if it is not too far away. In the event that I have to be away from my desk for more than a normal sleep cycle i will always set a hard stop.

For me stopping out is the hardest part of trading. I love setting orders, getting filled and taking profit but I do not like stopping out. If you can learn to hold your positions until your stops trigger and get out decisively once they do you will be on your way to trading successfully. Remember that stop losses are merely the cost of doing business and as long as you executed your system well you should not let it get you down.
Sam
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Re: Risk Management — Stop Losses

Post by Sam »

Hi Jesse,

From what I see stop losses reduce risk but can also reduce strike rate especially with volatile assets like cryptos. The tighter the stop the more perfect the entry must be. With too tight a stop you could turn every winning trade into a loser. A tighter stop could also mean you need to trade more frequently since each trade must be smaller due to the reduced strike rate. Can you share statistics for EMASAR that demonstrate the effect of different stop loss strategies on profits for prior cycles?
jesse
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Re: Risk Management — Stop Losses

Post by jesse »

Sam wrote: Wed Mar 03, 2021 9:19 pm Hi Jesse,

From what I see stop losses reduce risk but can also reduce strike rate especially with volatile assets like cryptos. The tighter the stop the more perfect the entry must be. With too tight a stop you could turn every winning trade into a loser. A tighter stop could also mean you need to trade more frequently since each trade must be smaller due to the reduced strike rate. Can you share statistics for EMASAR that demonstrate the effect of different stop loss strategies on profits for prior cycles?
hey sam ~

stop losses are tricky in crypto due to the volatile nature of the market and i have found that i vastly prefer not to use hard stops as it is very common for price to quickly wick through areas of support in search of liquidity before continuing to move in the direction of the prevailing trend. stops on emasar can be triggered by a sharp move into the underworld or the 50 ema entering the ocean so you will never know your exact stop loss, but you can use the beginning of the underworld as a hard stop. you will need to update it every few candles as the trend develops and the ocean moves up. regardless of whether you have a hard stop you will want to use a smaller position size the further your stop is from your entry price, as that increases your estimated risk.

the current 4h emasar trend on BTCUSD signaled at around $9600 with an estimated stop at the time of around $5700, or about a 40% estimated risk based on the initial entry. since then as price has increased the estimated stop loss has also moved up as the ocean has moved along with price. price spent some significant periods of time on the beach and in the ocean, but while 50 ema crossed below the 200 ema it never entered the ocean to trigger a stop.

https://www.tradingview.com/x/LINmAbs4/

this was a challenging time to buy the dip as the market struggled to hold 10k, but while price was wicking off the buoy at 9900 the estimated stop loss was only 9300, offering only 6% estimated risk, so stopping out early would offer deminished benefit. since then price has wicked all the way to top of the underworld and the 50 ema has not yet again crossed below the 200ema. this was not a place you would have wanted to have triggered a hard stop :

https://www.tradingview.com/x/ckTtD0AC/

considering a less successful emasar signal … in March 2020 emasar signaled a short entry on 4h BTCUSD at around 8200 with an estimated stop of around 10k. price went on to quickly drop 50% before rallying again to eventually cross into the underworld around 8200 for a break-even trade by the time the stop was triggered. in this situation you clearly would have been better off to stop out on the 4h death cross of the 50 and 200 emas around 7300 but in the prior example (current trend) this would have had you selling BTC around 11.1k. so while tighter stops might be apealing in the short term, in my opinion you make the most money by staying in major long term trends by just following the 4h emasar signals. as an alterative to using tighter stops you can implement a trimming and re-entering strategy so that you can effectively lower your cost basis (and your risk) without exiting the trend prematurely. in this example the closes beyond the 4h sky would have been fantastic trimming opportunites.

https://www.tradingview.com/x/irOzkyqO/
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