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Neal: Do you couple this with money management advice? |
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Chuck: When using any stops based on multiples of ATR, we should keep in mind that volatility can quickly expand to where our risk isn't greater than we intended. We do not want to unknowingly exceed the risk limitations dictated by our money management scheme, so we should also have a ''worst case" dollar-based stop available or be prepared to reduce our position size quickly as the ATR values expand. When should we reduce our position size and when should we implement our fixed-dollar stop? |
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If we are on the right side of the volatility expansion, it may not be wise to reduce our position size just as the trade is beginning to do what we hoped for. For this reason, I prefer to implement the dollar-based stop on profitable positions, rather than reducing the size of winning positions prematurely. We obviously want to have big positions in our winners and small positions in our losers. Therefore, it would make sense to reduce our position size only if the volatility is increasing in a trade that is going against us. |
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Once extremely large profits have been achieved, positions can safely be reduced without sacrificing too much in the way of potential profits. |
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Chuck LeBeau's e-mail address is chuck@traderclub.com. |
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