Trade Stops


here is an expression that, “There are old traders; and there are bold traders;
but there are no old bold traders.” Traders that don’t use stops go broke.
The Turtles always used stops.
For most people, it is far easier to cling to the hope that a losing trade will turn around
than it is to simply get out of a losing position and admit that the trade did not work
out.
Let us make one thing very clear. Getting out of a losing position is absolutely critical.
Traders who do not cut their losses will not be successful in the long term. Almost all
of the examples of trading that got out of control and jeopardized the health of the
financial institution itself, such as Barings, Long-term Capital Management, and others,
involved trades that were allowed to develop into large losses because they were not
cut short when they were small losses.
The most important thing about cutting your losses is to have predefined the point
where you will get out, before you enter a position. If the market moves to your price,
you must get out, no exceptions, every single time. Wavering from this method will
eventually result in disaster.
Turtle Stops
Having stops didn’t mean that the Turtles always had actual stop orders placed with
the broker.
Since the Turtles carried such large positions, we did not want to reveal our positions
or our trading strategies by placing stop orders with brokers. Instead, we were
encouraged to have a particular price, which when hit, would cause us to exit our
positions using either limit orders, or market orders.

These stops were non-negotiable exits. If a particular commodity traded at the stop
price, then the position was exited; each time, every time, without fail.
Stop Placement
The Turtles placed their stops based on position risk. No trade could incur more than
2% risk.
Since 1 N of price movement represented 1% of Account Equity, the maximum stop
that would allow 2% risk would be 2 N of price movement. Turtle stops were set at 2
N below the entry for long positions, and 2 N above the entry for short positions.
In order to keep total position risk at a minimum, if additional units were added, the
stops for earlier units were raised by ½ N. This generally meant that all the stops for
the entire position would be placed at 2 N from the most recently added unit.
However, in cases where later units were placed at larger spacing either because of fast
markets causing skid, or because of opening gaps, there would be differences in the
stops.
For example:
Crude Oil
N = 1.20
55 day breakout = 28.30
Entry Price Stop
First Unit 28.30 25.90
Entry Price Stop
First Unit 28.30 26.50
Second Unit 28.90 26.50
Entry Price Stop
First Unit 28.30 27.10
Second Unit 28.90 27.10
Third Unit 29.50 27.10
Entry Price Stop
First Unit 28.30 27.70
Second Unit 28.90 27.70
Third Unit 29.50 27.70
Fourth Unit 30.10 27.70

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