Strategies For Reducing Riskwith Alessio Rastani

leadingtrader.com

The Science of Using A Stop-Loss

This presentation is neither a solicitation nor an offer to Buy/Sell stocks, futures or options.

No representation is being made that any account will or is likely to achieve profits or losses

similar to those discussed on this webinar. The past performance of any trading system

or methodology is not necessarily indicative of future results.

Strategies For Reducing Riskwith Alessio Rastani

leadingtrader.com

The Science of Using A Stop-Loss

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1)1) Understanding a stop-loss orderUnderstanding a stop-loss order

2)2) My top 3 techniques for placing a stop: My top 3 techniques for placing a stop:

(i) simple(i) simple(ii) advanced(ii) advanced

1)1) A key indicator to watch before you place a A key indicator to watch before you place a tradetrade

2)2) Ideal places to place a stopIdeal places to place a stop

3)3) Where You should never place your stopWhere You should never place your stop

4)4) Best and Worst Times To TradeBest and Worst Times To Trade

The Agenda

“You Can Never Go Broke Taking A Profit…” ~ Wall Street Saying

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How Most People TradeHow Most People TradeBUYBUY

PricePrice

SELLSELL

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11Sell orderSell order

BuyBuy 22

Sell orderSell order

Sell orderSell order

Sell orderSell order

UnlimitedUnlimitedProfitProfit

Limited lossLimited loss

Use Stop Loss OrdersUse Stop Loss OrdersTo Control RiskTo Control Risk

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You can be wrong and still make money

• Win 9 times, and lose once• Win $100 x 9 = $900• Lose $1000 • Net: - $100

How Most People Trade (wrong way)How Most People Trade (wrong way)

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You can be wrong and still make money

• Lose 5 x and win 5 x• Lose $100 5 times.• Lost: $100 x 5 = $500

• Win $300 x 5 = $1500• Net = $1000

How Professionals Trade (the right way)How Professionals Trade (the right way)

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1)1) An order placed with a broker to exit the market An order placed with a broker to exit the market (either to sell if you originally bought, or to buy (either to sell if you originally bought, or to buy back if you originally went short).back if you originally went short).

2)2) It is designed to LIMIT your LOSS and exposure It is designed to LIMIT your LOSS and exposure to RISK.to RISK.

3)3) It is not a choice. It is a MUST if you wish to It is not a choice. It is a MUST if you wish to protect your capital.protect your capital.

What is a Stop-Loss?

leadingtrader.com"Rule No.1 is never lose money. Rule No.2 is never forget rule number one.” Warren Buffett

PROTECT YOUR CAPITAL!

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Where Do You Place Your Stop-loss?

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It Depends on at least 3 factors:It Depends on at least 3 factors:

• Your StrategyYour Strategy

• Volatility of the marketVolatility of the market

• What You See On The Chart: What You See On The Chart: (i) Support/Resistance(i) Support/Resistance(ii) Price Structure(ii) Price Structure

Where Do You Place Your Stop-Loss?

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IMPORTANT: Your stop-loss should be placed based on

the LOGICAL dynamics of the market!

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It does NOT depend on:It does NOT depend on:

(1)(1) How much money you are prepared to How much money you are prepared to lose or risk on a trade… lose or risk on a trade… (this is usually misunderstood)(this is usually misunderstood)

(2)(2) Some arbitrary figure or percentage Some arbitrary figure or percentage away from the entry price.away from the entry price.

Where Do You Place Your Stop-Loss?

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Wide Stops or Tight Stops?

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Very Tight Stops: too close to price(NOT RECOMMENDED) entry

Stop-loss

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Very Wide Stops:unnecessarily too far from the entryprice(NOT RECOMMENDED)

Stop-loss

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Wide Stop: A safe distance awayfrom the price

Stop-loss

entry

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Tip No.1 : Use wider stops and give it plenty of “wiggle room” (higher odds of success)

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Tip No. 2: Reduce your position size (e.g. trade FEWER contracts/shares or £/per

point) when using wide stops

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Logical Techniques For Placing A Stop-Loss

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A Useful Rule To Remember: Ask Yourself: “Where does the price have

to move to, to prove that I am wrong?”

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BAD NEWS:The more “smart” you think you are, the

more money you will lose…(“smart” people don’t like to be wrong)

GOOD NEWS:The more honest you are to yourself, the

better a trader you will be…

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Logical Techniques For Placing A Stop-Loss

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Strategy No.1:Price Structure: Support & Resistance

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Price Structure: Support & Resistance

Most common and basic place for stop-Most common and basic place for stop-loss:loss:

• Previous highs and lowsPrevious highs and lows

• Beneath support or above resistanceBeneath support or above resistance

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Stop-loss at recent previous lows(support)

Buy Entry at Breakout(from resistance)

Stop-loss at recent previous highs(resistance)

Short Entry at Breakout(from support)

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EURUSD – 5 min

Flag Example

Buy Entry at Breakout(from resistance)

Stop-loss beneath recentLows (support)

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Flag Example

Stop-loss beneath recentLows (support)

Buy Entry at Breakout(from resistance)

Strategy No.2:Volatility-based stops

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Plot “Average True Range” Indicator on your chart

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Average True Range(ATR)

Free Charts: getETX.com

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Free Charts: getETX.com

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Average True Range (ATR)(setting 14)

Is a measure of volatility in the marketIs a measure of volatility in the market

Is an average of the range (difference Is an average of the range (difference between highs and lows of each bar) of between highs and lows of each bar) of the price bars for every 14 periods.the price bars for every 14 periods.

High Volatility = High ATR readingsHigh Volatility = High ATR readingsLow Volatility = Low ATR readingsLow Volatility = Low ATR readings

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Average True Range

Average True Rangeis 130 Dow points

Dow Jones 30 - Daily

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Average True Range

Dow Jones 30 – 1hr

Average True Rangeis 32 Dow points

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Average True Range

Dow Jones 30 – 5 min

What is ATR?

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Average True Range (ATR)(setting 14)

Rule For Stop-Loss Placement: 2 x ATRRule For Stop-Loss Placement: 2 x ATR

For example: For example: if ATR is equal to 10 points (or 10 if ATR is equal to 10 points (or 10 pips/cents) then use a stop-loss 20 points pips/cents) then use a stop-loss 20 points (or 20 pips/cents) away from your entry.(or 20 pips/cents) away from your entry.

Why? Because (ATR x 2) = (10 x 2) = 20Why? Because (ATR x 2) = (10 x 2) = 20

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Average True Range

Dow Jones 30 – 5 min chart

What is the stop-losssize based on ATR?

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Average True Range

Dow Jones 30 – 5 min chart

ATR x 2 means13 x 2 = 26 point stop-loss

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Squeeze setup:Bollinger bands (20, 2), Keltner Channels (20,1.5)MACD momentum (8, 21 histogram)(video is on: LeadingTrader.com/squeeze

Average True Range (ATR)

S&P mini-futures – 5min

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Average True Range (ATR)

S&P mini-futures – 5min

Entry when the squeeze fires!But where is your stop-loss?

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S&P mini-futures – 5min

For stops – you can use either:PRICE STRUCTURE (previous highs/lows)

OR use 2 X ATR

2 x ATR = 2 x 1.6 = 3.2 pt stop distance

2 x ATR = 2 x 1.0 = 2 pt. stop distance

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EURUSD – 4hr

Short Squeeze fires!Where is your stop?

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EURUSD – 4hr

Based on Price Structure(previous highs = 1.3350)

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EURUSD – 4hr

Based on Volatility:ATR x 2 = 38 x 2 = 76 pips away from entry price

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Risk Free trade: Once in profit, Don’t forget to move your stop to breakeven!

TIP – WRITE THIS DOWN!You can also trail your stop based on 2 X ATR

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You can trail your stop based on 2 X ATR

As the market moves in your favour,Trail your stop based on 2 x ATR

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Keltner Pullack Setup (K.P.)

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Keltner Pullback Setup (K.P.)

Also Volatility Based – but easier than ATR.Also Volatility Based – but easier than ATR.

Use Keltner Channels (volatility based Use Keltner Channels (volatility based envelope indicator) - settings:envelope indicator) - settings:

(21 period, 2.0 ATR multiplier, 14 ATR) – Daily charts(21 period, 2.0 ATR multiplier, 14 ATR) – Daily charts

(21 period, 2.5 ATR multiplier, 14 ATR) – Intraday Charts(21 period, 2.5 ATR multiplier, 14 ATR) – Intraday Charts

PLUS: MACD setting (20,43,3) PLUS: MACD setting (20,43,3)

(NOTE: On getETX.com charts, instead of MACD you can (NOTE: On getETX.com charts, instead of MACD you can use the use the “Awesome Oscillator” setting: 21,89“Awesome Oscillator” setting: 21,89))

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Keltner Channel settings:(21, 2.0) for Daily charts or (21, 2.5) for intraday

getETX.com

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As the market moves in your favour,Trail your stop based on 2 x ATR

Daily Chart settings

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Intraday Chart settings

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As the market moves in your favour,Trail your stop based on 2 x ATR

EURUSD – Daily Chart

Awesome oscillator (21,89) on getETX.comis used as a directional filter

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As the market moves in your favour,Trail your stop based on 2 x ATR

EURUSD – Daily Chart

Awesome oscillator (21,89) on getETX.comis used as a directional filter

Sell Short Example:Entry at pullback to the Mid-band (21

EMA) (blue arrow)Stop-loss at UPPER Band (red arrow)

First profit target at LOWER Band (magenta arrow)

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As the market moves in your favour,Trail your stop based on 2 x ATR

LONG (Buy) Example:Entry at pullback to the Mid-band (21 EMA)

Stop-loss at LOWER BandFirst profit target at UPPER Band

LONG (Buy) Example:Entry at pullback to the Mid-band (21 EMA)

Stop-loss at LOWER BandFirst profit target at UPPER Band

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As the market moves in your favour,Trail your stop based on 2 x ATR

Sell Short Example:Entry at pullback to the Mid-band (21 EMA)

Stop-loss at UPPER BandFirst profit target at LOWER Band

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Where you should never place your stop

Too close to entry priceToo close to entry price

Ignoring the volatility (ATR) of the marketIgnoring the volatility (ATR) of the market

Close to an obvious point of support and Close to an obvious point of support and resistance (place the stop slightly beyond this resistance (place the stop slightly beyond this area)area)

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Best and Worst Times To Trade

Best Times: Best Times: Tuesday – Thursday 10am ET – 11:30am ET and Tuesday – Thursday 10am ET – 11:30am ET and then at 3pm ET – 4pm ET (last hour)then at 3pm ET – 4pm ET (last hour)

Worst Times:Worst Times:Too close to news announcementsToo close to news announcementsLunchtime Doldrums 11:30am – 2pm ETLunchtime Doldrums 11:30am – 2pm ETTypically the first half hour of market openTypically the first half hour of market openChoppy MarketsChoppy Markets

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Recommended Charts & Trading Platform:

All Countries (except USA):getETX.com (FREE)

USA:Tradestation - contact: Tony OrtizLeadingTrader.com/charting

France, Germany or Italy (FREE):LeadingTrader.com/charting

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THANK YOU very muchfor attending this webinar!

Next FREE Webinar: 2-Day Live Trading Webinar

with Alessio Rastani and Kevin BurtonThursday 3rd May and Friday 4th May