Original Question: My question is regarding your protection stop on winning trades, once you are up more than 3R and trail your stop to 2.6R (even after a scale out), where do you place your protection stop? Higher that the 2.6R?
First of all this question shows how well you already understand my methods. This is awesome!
The 2.6R base profit lock-in rule is just the one for my main setup (quiet and tight setup aka QTS), for other setups the actual numbers can vary slightly. It depends on the goal risk-multiple I have to reach with regards to the win rate of the respective setup. For QTS this is actually 3R as I can often place sharp initial stops around -3% to -4% on chart level. 3R would then translate roughly to a 10% stock advance which oftentimes aligns with natural scale-out levels on the charts. This is based on my observation over the years and works well in practice.
Now back to your question: The protection stop is a stop I place in trades which are actually extended well beyond their base goal risk-multiple! I do not trail my stop but instead employ the 2.6R rule early on and then later switch to a protection stop in order to be protected against flash crashes and other extreme volatility scenarios.
So a protection stop and a 2.6R rule stop are mutually exclusive! In real trading however it could make sense to split the 2.6R stop into two stops sometimes. This is true when the 2.6R stop would be right below a major technical resistance level. In such a case one could split the stop order and place one a little lower and the other a little higher so that it gets triggered quickly in case of a sudden break. This technique could give you a better exit.
However I actually did that only once or twice since 2018…
In reality I oftentimes simply place the ‘2.6R’ stop order at slightly better level and not where I expect the crowd to place their stops. (The PLL concept help with this). A trade is only a data point and it is more about the average over many trades than hitting the exact values (2.6R rule or maximum risk %) on each trade like a robot. Trading calls for discretionary intervention of varying magnitude but don’t use this as an excuse to violate rules all the time. Especially not when you are a novice trader with little experience. Again, If you do this you must employ statistics in order to make sure that you do hit the values on average!
So basically the order and nature of my stop placements is as follows:
#1 The initial stop loss order for the trade to make sure that I don’t lose more than my maximum risk per trade
#2 The base profit lock-in stop order (2.6R rule) to secure my required base risk-multiple. (can be slightly different than 2.6R for other setups)
#3 The protection stop which slowy trails price during any ensuing rally beyond my goal-risk multiple. This is NOT a TRAILING STOP with the intend of being triggered!
Each stop order replaces the one before.
Once a trade made progress beyond the goal risk-multiple (~3R) I wait until there are a couple strong potential support levels between the stop #2 and the current price. When the cushion is large enough I do trail the stop by replacing #2 with #3.
!Important! I do give my stocks room to move and always try to intervene as little as possible in order to let the market do it’s magic for me. This is especially true once a trade is extended and trades well beyond it’s goal risk-multiple.
I don’t move stops to breakeven early on. Furthermore I do seek scale-outs to give me as much room as possible when the goal risk-multiple comes into play. And I certainly give stocks all the room they need later on when they are big winners already.
The defensive stops are complemented with proactive, price and volume based, red flags which make me exit or realize partial profits into strength.
In stock handling I generally try to act more like an artist without strict adherence to rules. I only turn into a robot when it comes to selling into weakness aka when my stop order is hit. On the other side even the 10% scale-out rule allows for some discretionary intervention if a nearby PLL, pivot or other significant price level comes into play.