In this article, Michael Taylor looks at a way to increase your trading strike rate by varying stop losses.
What if there was an easy way to increase your strike rate?
Managing risk is paramount in the volatile world of trading.
You’ll have heard of Mark Minervini talk about ‘batting average’. This is your strike rate, your average win, and your average loss.
And to increase your strike rate, you can use the concept of staggering stop losses. This method involves splitting your stop loss into three parts to enhance your strike rate and mitigate potential losses. In this article we’ll look at the intricacies of this strategy, explaining how it works, its benefits, and how you can implement it to improve your trading performance.
Understanding Staggered Stop Losses
A stop loss is an order placed with a broker to buy or sell a security when it reaches a certain price, designed to limit a trader’s loss on a position. The concept of staggering stop losses involves dividing your total stop loss amount into three separate orders at different price levels. This technique aims to provide a buffer against market volatility, offering more flexibility and a higher likelihood of remaining in a trade during minor market fluctuations.
Why Stagger Stop Losses?
There are three reasons why you might want to stagger your stop losses.
Firstly, an improved strike rate. By staggering your stop losses, you allow for minor price movements without getting stopped out prematurely. This can lead to a higher percentage of winning trades, as the strategy provides room for the market to breathe.
Secondly, you may have reduced emotional stress. Trading can be emotionally taxing, especially when dealing with repeated stopouts. Staggered stop losses can help reduce the emotional burden by breaking down the potential loss into smaller, more manageable parts.
Finally, enhanced risk management. This strategy enables you to manage risk more effectively. By setting multiple stop loss levels, you can control the amount of capital at risk and adapt to changing market conditions.
Implementing Staggered Stop Losses
To effectively implement staggered stop losses, follow these steps:
1. Determine Your Total Risk
Calculate the total amount of capital you are willing to risk on a trade. This will be the sum of your three staggered stop losses.
2. Identify Key Levels
Analyse the chart and identify the key level where you will place your original stop loss. These levels should be strategically chosen based on support and resistance.
3. Divide Your Risk
Allocate your total risk amount into three equal parts. For example, if your total risk is £300, you would place three stop loss orders, each risking £100.
4. Place Your Orders
Enter your stop-loss orders at the predetermined levels. You may incur three additional commissions or if you use IG you can use parent and wave orders in order to pay only one commission.
Example of Staggered Stop Losses in Action
Let’s consider a practical example. Suppose you have identified a trade on a stock currently trading at 50p. You decide to risk £300 on this trade. Based on your analysis, you determine the ideal stop loss to be at 47p. And if we wanted to stagger our stops, we could use these levels:
- 48p (first stop loss, risking £100)
- 47p (second stop loss, risking £100)
- 46p (third stop loss, risking £100)
By placing your stop losses at these levels, you allow the stock to move within a bigger range without incurring the full £300 loss immediately. This staggered approach provides the stock with room to fluctuate, potentially preventing you from getting stopped out fully during minor market noise.
Advantages and things to consider
Staggered stop losses offer greater flexibility, allowing you to adjust your strategy as the trade progresses. If the stock shows signs of strength, you can tighten your stop losses to lock in profits.
Plus, in highly volatile markets, staggered stop losses can be particularly beneficial. They help you stay in the trade during short-term price swings, increasing the likelihood of capturing a larger move.
And then there’s the added benefit of being disciplined. Successful trading requires discipline. Staggered stop losses help enforce this discipline by setting predefined exit points, reducing the temptation to hold onto losing positions.
However, it’s essential to consider potential drawbacks.
Managing multiple stop loss orders can be more complex than a single stop loss. Ensure you have a clear plan and stay organized.
And in fast-moving markets, there is a risk that your stop-loss orders may not be executed at the exact levels you set. Slippage can occur, resulting in slightly different exit prices. But this is true of all stop losses and not specific to staggered stops.
Conclusion
Staggered stop losses are a powerful tool in a trader’s arsenal, offering improved risk management, reduced emotional stress, and a higher strike rate. By dividing your stop loss into three parts and strategically placing them at key levels, you can navigate market volatility more effectively and increase your chances of success.
Michael Taylor
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