Long Term Secrets To Short-Term Trading

Figure 15.4 Buy a S&P 500 breakout of the highest high last x days 
exit 13 days later $3,500 stop. 

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Again, we exit some days later. A $3,500 stop was used. We are chasing strength to buy. Buying new 
highs is a successful strategy. The preceding is not a system, rather an illustration to drive home the 
importance of letting strength lead the way. Most traders are frightened or intimidated by excessive strength. 
Thus they do not buy, or worse yet, sell short. 
As it has been said, the race or the fight, may not always go to the biggest, the fastest, or the toughest. 
But, my friend, that is the way to bet. 
Comments on Setting Stops-Dollar Loss and Unpredictability 
There are only two givens to this business, first, you must control loss; second, price is highly 
unpredictable. The goal of system development is to create the ultimate money-making machine that, like an 
oil well, just keeps pumping out profits. Although you may never attain that goal, you can acquire an amazing 
amount of insight into correct trading from system development. 
What Is the Purpose of a Stop? 
Correct stop placement provides an example of what system development has taught us. We use stops for 
one and only one reason-to protect us when our system fails. Systems fail all the time; if that potential liability 
did not exist, stops would not be needed. Stops are our defensive shield and what they protect us from is the 
unpredictability of (1) our system and (2) the market itself. 
The game of trading involves so much unpredictable behavior that stops can hurt you, if they are too 
close. Indeed, the closer your stop, the more times "they will have gunned for you," the more you will be 
stopped out, and the more paranoid you will become. Since no trader I have met can predict down to a gnat's 
eyelash (due to all the random activity of price), our stops must be beyond-or past-random fluctuations. They 
must be far enough away that if they are hit it will be because of real-not random-activity. That is Lesson 1. 
Now Comes Reality 
Here's the next important thing about stops: since their purpose is to defend against ruin, they need to also 
be based on money management principles. As an example, here is the same S&P 500 Day Trading system 
but with three different stops.