The Optimal Stop Loss

I came across this 4-minute video featuring Linda Raschke posted over 15 years ago.

In the video, Linda talks about tight stops and how many traders fall prey to getting pinged out on noise.

She suggests doing this instead:

Use a wider initial stop of 3 x ATR

So if you are trading on a 5min chart and the ATR is 10pts, then the initial stop would be 30 pts.

Then once the trade moves in your direction, you can start to tighten things up.

Whilst we are on the subject of the trade moving in your direction, Linda recommends also using a time-based stop.

If price doesn’t start moving within 7 bars, you should consider dumping it.

What about putting stops under/over key levels?

Well, studies that Linda has done suggest not doing that…

Instead, stick with the stop based on a function of ATR and then tighten up as price moves in your favour.

Food for thought over the next few days…