The first rule of the stock market is found in The Real Warren Buffett:
Rule No. 1: Never lose money.
Rule No. 2: Never forget rule No. 1
With this in mind, let me tell you a story about the evolution of stops.
The Evolution of Stops
In the 1990s there was a thing called the Omega Research (later became TradeStation) System Trading and Development Club that reviewed and published a handful of trading system every couple of months or so.
Smarter.Stops Applied to the Daily Chart of GOOG
Within a short time, most of the Omega STAD strategies came to use what they called “common exits”, a stop loss calculation based on average true range similar to Chuck LeBeau’s Chandelier Exit:
The Chandelier Exit
We like the Chandelier Exit as one of our primary exits for trend following systems. (The name is derived from the fact that the exit is hung downward from the ceiling of a trade.) This exit is extremely effective at letting profits run in the direction of a trend while still offering some protection against any reversal in trend. In fact our research and that of our friend Dr. Van Tharp has shown that this exit is so effective that we can literally enter markets at random and if we use this exit the results over time are likely to be profitable. (If you don’t believe us just test it yourself over a handful of markets.) In general the best values for the ATR in most markets ranges between 2.5 and 4.0.
LeBeau’s code has been public for more than a decade while TradeStation has offered built-in ATR strategies for a number of years. Along the way, Chuck reiterated his views in an article at the Van Tharp Institute website:
Don’t Neglect Your Exits
We first observed the impact of exits years ago when attempting our research of popular indicators we were testing as entries. We found that even a minor variation of the exit strategy would drastically affect the number of trades, the size of the winners and losers, the percentage of winners, the size of the drawdown and the total profitability. Although we set out to test entries, we quickly discovered that the performance data was entirely dependent on the exits we used and the entries had little if anything to do with the results.
Legendary trader William Eckhardt agreed:
Many systematic traders spend the majority of their time searching for good places to initiate. It just seems to be part of human nature to focus on the most hopeful point of the trading cycle. Our research indicated that liquidations are vastly more important than initiations. If you initiate purely randomly, you do surprisingly well with a good liquidation criterion.
In The New Market Wizards, Eckhardt further observed:
While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of a grain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader.
Get The Definitive Edge
It is now the 21st century. With a computer in every house, there is no reason to trade blind and be disadvantaged.
Stops should not be vague or “mental”. They must be statistically valid and accurately reflect volatility because arbitrarily placed or incorrectly calculated stops doom the trader to exit in an untimely manner.
The successful trader never, ever places stops based on what he can afford to lose. His definitive edge is risk management; stops must be placed where they ought to be and the trader reduces the size of the trade as necessary to accommodate the appropriate stop.
The question is which stop to use?
There are lots of stops available for free on the Internet. There are also quite a few that cost hundreds, if not thousands of dollars. I have tested many of them and while free does not mean inferior, they are prone to whipsaw because so many people are using the same exit. Expensive rarely means superior; if anything, the cost seems to rise dramatically along with the size of the vendor’s sales team and marketing activities.
I conducted extensive research and developed an entire suite of trading tools to meet my exact technical and professional requirements. The result was SmarterSuite for TradeStation and eSignal. Visually stunning and intuitive to use, my indicators, paintbars and strategies apply objective, rule-based quantitative analysis distilled from more two decades of insight and observation. At the heart of it is SmarterStops.
In December 2008, I received what I consider to be the ultimate compliment — from Chuck LeBeau!
I have been a fan and an admirer of your work for many years and, in fact our … exit logic contains an idea or two I learned from you.
. . .
I do not view us as competitors but rather think of us as allies in a battle against ignorance and the unacceptable risks of buy and hold. I find your [stops] to be both effective and intelligently designed.
While SmarterStops is not free, it is certainly NOT expensive because I don’t spend a single penny on advertising. With SmarterStops, you get value and comfort in knowing that I limit the number of users to maintain the edge for myself and members.
Introducing The SmarterSuite
After I released SmarterStops, members wanted more. Could the stops be used as entry points as well as exits?
The answer, of course, was YES. I developed the seven-steps to better stock trading and made my personal trading tools available to everyone.
SmarterSuite Applied to a Daily Chart
SmarterSuite includes indicators and paintbar studies that measure elements critical to trading: relative momentum, volatility, price structure and risk.
It also includes two trading strategies that help maintain discipline by automatically generating buy/sell signals. They are the only trading systems I know of that empower traders to test a number of variables — especially the amount of leverage used — without additional programming. TradeStation users can incorporate Smarter.Stops and build their own customized trading strategies.
If you make a bad trade and you have money management you are really not in much trouble. However, if you miss a good trade there is nowhere to turn. If you miss good trades with any regularity you’re finished. — William Eckhardt
For Swing and Intraday Trading
Whether you trade stocks or ETFs based on a daily chart (“swing trading”) or day-trade stock index, currency or commodity futures (“intraday trading”), SmarterSuite helps traders manage risk and make decisions with confidence.
Bonus for TradeStation Users
TradeStation users can build their own custom strategies quickly without any additional programming by combining the exit strategies provided with any entry that is built into TradeStation, downloaded from TradeStation forums or found in my special collection of reference material. Traders proficient in EasyLanguage can use the functions and sample code as building blocks to build your own custom black box.
TradeStation users with RadarScreen can take advantage of being able to monitor buy and sell signals generated by SmarterStops for up to 1,000 symbols.
Why TradeStation or eSignal?
SmarterSuite is only available for TradeStation or eSignal (Pro or OnDemand). They will never be available for any other other platform as I cannot provide support for software I do not personally use.
In order to use the SmarterSuite of trading tools, members must have an active subscription to eSignal Pro/OnDemand or TradeStation and have it installed on their computer. They are responsible for software and data fees associated with using eSignal and TradeStation.
*Members are responsible for all subscription and data fees associated with TradeStation or eSignal. I am not associated with TradeStation or eSignal in any way and receive NO compensation or PR of any kind in exchange for using their platforms.