A Swing-Traders Stop Loss Calculator
Please look at the following chart. It is the chart of a stock doing its ordinary thing over a period of about a year.
The line under the stock's price bars is the stop loss based on the 2-day maximum Trure Range (the same True ange developed by Welles Wilder, except that here we used the maximum True Range rather than the average True Range). The stop loss formula used in the chart is similar to the one used by ST Stops with the muliplier set to 2. There is only a slight difference. With ST Stops, if the price range between low and hgh three days back is greater than the maximum True Range computed for the most recent two days, we modify the two-day maximum True Range to reflect that. Note that the buy signal in the above chart occured on 7/20 at a price of $117.25, when there was a price gap and a surge in volume (not shown). The sell signal occurred on 9/11 when the stock dropped below the highest point reached by the stop loss line since the buy signal. The gain was 6.93% in 36 days. If you look to the far right, you will see that the price is $117.50. If the investor had bought and held until that date, the gain would have been .21% after 222 days of waiting.
The long-term investor would have tied up his money for most of a year with little gain and with potentially big losses while waiting (if he had sold earlier in discouragement). The trade on the left shows what we mean when we say short-term and intermediate-term investors seek "more bang for the buck," meaning that they are after much greater gain for the time invested. These investors are also known as swing-traders. After selling, they look for another stock setting up for a price surge. These are the people who have taken the time to learn about "setups" and sell signals (such information is available on this site). It is not something that is learned overnight. These are the people for whom ST Stops was created. Please note that we could easily have found charts where the short-term swing gives a much greater return. There is nothing about the above stock that is spectacular. It just shows a stock going sideways for about a year. Now look at this chart.
The stock is bought on a similar signal at 76.07 and sold at 91.31 after 91 days for a gain of 20.03% (without commissions) when the stock fell below the red line. Later it went a little higher, but note the blue arrow. The short-term trader would not worry about whether he sold too soon. He would just look for the next "setup." Traders often make gains of 5% to 10% in just a few days. They can do this because they are careful about when they buy and they follow a strict sell discipline.
The Rationale for ST Stops
This stop loss calculator is intended to be useful to short-term and intermediate-term investors. We start with Welles Wilder's average true range measurements of volatility. However, we have made modifications to Wilder's methodology to better suit the needs of those with shorter investment time horizons.
Check a few stock charts and you will see that the most "bang for the buck" occurs over a period of less than three months. A stock may have its greatest annualized return during a period of a few days, a few weeks, or a few months. Capturing these short-term trends or surges and selling when they are over is the way most top traders achieve annual returns of well over 50%. To this end, we have modified Wilder's methodology in the following ways.
1. We focus on the last three days rather than the last 14 or 20 days, because we are interested in defining the most recent volatility rather than the average volatility over 14 days.
2. Rather than average the True Range over a period of 14 days, we determine the maximum True Range for the shorter period in order to reduce the probability of an unnecessarily triggered stop. The theory behind stop losses is that they should be activated when a sell signal occurs. With volatility-adjusted stops, the signal occurs when a stock's price declines to a point that is beyond what is likely, given the stock's volatility pattern. We are interested in reducing false sell signals. Since we are using data from only 3 days, we believe that stop losses based on the maximum excursion during that period is appropriate for the purpose.
3. Normally, based on Wilder's equations and with three days of data available, only the last two days of data out of the three would be used in calculating True Range (only one data point is used from the third day). We calculate True Range for the last two days the same way Wilder would, but we also factor in range data from that third day as well. We do that in case the range on that third day is greater than our True Range calculations for the last two days and also to compensate for any gaps that may have occurred between the second day and the third day.
4. Look at the image below for an example of the investor's daily procedure. First, he would copy the data in row 11, cells B, C, and D into row 10, cells B, C, and D. Then, he would copy similar data in row 12 into row 11. Finally, new data would be entered in row 12. Of course, in practice, he would simply select the appropriate cells in both rows 11 and 12 and then copy and paste them one row higher. It is important that the user avoid cutting and pasting. Instead, he must copy and paste. Also, he must avoid deleting cells. To delete the contents of a cell, he should press the "Del" or "Delete" key on the keyboard. In our opinion, there is no need to delete the contents of a cell. Pasting over a cell will automatically delete its previous contents.
The calculartor is designed to track 15 positions. The above image shows what ST Stops looks like befor the current date is entered in cell A-7 (goldenrod in color. The same data is entered in each position for illustration purposes only. Also note that there are no Operational Codes in the purple section on the right. Without codes and the date, you will see "#DIV/0!" in the output cells. If valid codes are entered but the present date has not yet been entered in cell A-7, "FALSE," or "XXXXX" will appear in various cells as shown in the above image (valid Operational Codes were present but they were blotted out of the image). When the codes and current date are entered, numbers appear where you see "FALSE" or "XXXXX" in the image.
1. Using 3 days of data means it takes minimal time to set up a stock for stop loss computations, Volatility measurements are current, and with this calculator, it takes minimal effort to maintain data for a list of up to 15 stocks. Using only three days of data, there is no need to pay for a service to download data, and it is not necessary to manually enter 14 or more days of data on each stock you want to track.
2. Each stock has its own multiplier. The multiplier is used to weight the volatility measurement. For example, if the computation indicates that the stock could drop from 50 to 49 because maximum excursion has been about 1 point below the reference (high, low, or close), and you want it to give the stock more room, you can set the Multiplier to something greater than 1. To move the stop closer, you could set the multiplier to some number less than 1. For example, if the calculator determines that the stock could decline 2.36 points and you think that would result in a stop that is too close, a multiplier setting of 1.85 would cause the calculator to assume its measurement was not 2.36 but 2.36 x 1.85 or 4.366. The effect of this would be to move the stop loss further away from the reference being used (high, low, or close). In other words, if you have some reason to believe that the recent volatility is not typical, you can move your stop closer or further away with the multiplier. Whatever you do, the result will be based on the behavior pattern and volatility of the stock rather than on some setting that has no relation to the stock's volatility.
3. Cell F-7 (goldenrod in color) is were you indicate the reference point for your calculations. If you want your stop loss computed with reference to the High, you would enter "1" in Cell F-7. If you want the Low to be your reference, you would enter "2," and if you want the Close to be your reference, you would enter "3." This would be an option chosen by a user who wants to base his decision on the closing price and intends to execute the sell order on the following day. All stop losses will be computed according to the reference you have selected.
4. There are three output columns. One is labeled "Long Stop" and the other is labeled "Short Stop." The "Short Stop" column is where your last computed stop loss will appear. The "Short Stop" column is where a short seller's stop loss will appear. However, a short seller's stop loss is not computed by subtracting the volatility measurement from the reference point. It is computed by adding it to the reference point. Rather than showing the sell price as with a stop loss, it shows a buy price, or the price at which the short seller covers his short position. Again, calculations will be made in reference to what has been entered in Cell F-7. It is also where a bullish investor might buy a stock that has been in a persistent downtrend. In addition to the two columns just described, there is a third column labeled "Points." The number shown in this column is the number of poiints the stop is placed below or above your selected reference point (High, Low, or Close).
5. As the stock fluctuates, stops may be generated in the "Long Stop" that are lower than a previous stop. A general rule of stop loss management is that you never lower a stop loss. You only raise it. Therefore, the user would ignore any stop that is lower than a previous stop. To facilitate this, the user should keep a record of the stop losses previously calculated for each stock being tracked. He could also generate a chart for each stock and mark the stop prices on them. The general rule for stops in the "Short Stop" column would be similar but opposite. That is, those stops should never be lowered.
When your operational codes expire, a notice will appear in the top right hand corner of the calculator, stating that you need to get new codes. Users can download the codes as needed. In order to avoid locking a person into a contract with a 6-month or 1-year commitment, the calculator is designed to require new codes once a month. That enables us to provide the tool with the same fee policy we use for all our subscriptions.
Warning: There are compatibility issues with Excel 2003 and earlier versions of Excel. Do not attempt to take the test or order ST Stops if Excel 2003 (or any earlier version of Excel) is installed on your system. ST Stops may permanently disable all menus of Excel 2003 or earlier versions, not only when using ST Stops, but for any application. Also, ST Stops will not function with these earlier versions of Excel. These issues do NOT exist with later versions of Excel Go to the test page (but not if you are using Excel 2003 or earlier versions of Excel).
CELL PROTECTION. The user of Stops must not enter anything in any cell that is not white or goldenrod (a bright mustard-like yellow) in color. Any non-white or non-goldenrod cell may have underlying but invisible formulas. If anything is pasted into a cell that is not white or goldenrod in color, the underlying formulas may be destroyed. If a formula is overwritten or deleted, that formula will no longer be there to do its job.
Fibonacci ratios appear throughout nature. They also appear in market behavior patterns. Elliot Wave Theory makes use of them in stock market trend analysis. Elliot wave analysis plots a graph of the up and down trends of the stock market. It shows five upward waves and three downward waves forming a complete cycle of eight waves. All of these numbers are Fibonacci numbers. These relationships can be applied to both short-term and long-term trends. Many technicians use the Fibonacci relationships in stock behavior patterns to find areas of support and resistance. For example, when a stock makes a significant upward move there is usually a subsequent minor decline as traders take their profits. Market observers have discovered that the relationship between the stock’s rise and the downturn that follows is frequently a Fibonacci relationship. It is not necessary to know how Fibonacci numbers are defined or the mathematical relationship between two Fibonacci numbers in a sequence. It is sufficient to know that the most significant Fibonacci retracements (expressed as percentages) are 23.6%, 38.2%, 50%, and 61.8%. A 23.6% “retracement” is not a 23.6% drop in the price of a stock. It is a giving up of 23.6% of the gain achieved by the last profitable move of the stock.
For example, if the stock moved from $40 to $50 the percentage retracements used would then represent retracements of $2.36, $3.82, $5.00, and $6.18, respectively. These amounts would be subtracted from the recent high. The expected support levels in a decline from the $50 high would therefore be at $47.64 for the 23.6% retracement, $46.18 for the 38.2%
retracement, $45 for the 50% retracement, and $43.82 for the 61.8% retracement. Therefore, traders will place their stops just below one of these levels. Thus, the stops will be triggered only if the expected support at these levels does not materialize. In a trend retracement, the most important areas of support or resistance are at 38.2% and 50%. The 23.6% level also offers support for stocks in a very strong trend.
It is often difficult to find a good entry point when a stock is moving up strongly. Traders who expect a stock to continue in a strong advance often buy a stock on a pullback to just above this Fibonacci level and place a stop just below it. If that support does not hold, they will be stopped out at a price only a little below their cost. A stock may get support at the 61.8% level but if it declines that far it is not getting the kind of support most traders like to see. It shows a relatively weak investor commitment to the stock. A retracement of 38.2% usually implies the prior uptrend will continue. A retracement of 61.8% usually implies a new trend is getting started. A retracement of 50% suggests uncertainty, but it is very common for a stock to resume an uptrend after a decline to this support level. A retracement of 38.2% is considered normal in a healthy trend. After such a retracement, the stock would be expected to break through the most recent high price on heavy volume as it resumes its uptrend. Without heavy volume on the breakout expectations would be diminished. The following image shows the Fibonacci module.
To make Fibonacci retracement calculations, enter the high and low prices of the stock’s most recent move in the boxes provided. Various Fibonacci levels will be displayed. Calculations are displayed to 4 decimal places because some traders need that level of precision for certain securities. Do not round off the calculation results. Instead, drop the digits that are not significant for the traded security. Stops should be below support rather than exactly at or above it for a security in an uptrend. Most traders will place their stops at some distance below the calculated levels. The amount of “cushion” a trader uses will generally depend on tolerance for risk, time horizon, and the particular trading discipline used. Stops will help you find the probable location of the nearest “ceiling” (resistance) or “floor” (support). Where a person places his or her order relative to that ceiling or floor is a personal matter. For a security in a downtrend (one you have sold short), you would reverse your procedure. That is, the stop should be above the Fibonacci resistance level if you have shorted a stock in a downtrend. In a downtrend, the lowest price reached in the current downtrend should be placed in the “High” box and the highest price reached before the downtrend started should be placed in the “Low” box.
The Excel Command Ribbon
It is extremely important that the user avoid the menu command ribbon because formatting, deleting, and sorting from the ribbon/menu can destroy the proper functioning of Stops. This "ribbon" is usually found at the top of a standard Excel spreadsheet. To reduce the chances that a person will unintentionally damage Stops, Stops does not display this ribbon. However, a person can perform basic functions by using the keyboard.
To copy a selection, select it and then depress the "Ctrl" key and the letter "C" at the same time.
To paste, place your cursor where you want it, then depress the "Ctrl" key and the letter "V" at the same time.
To save, press "Ctrl" and "S" at the same time.
To exit the program, click on the "X" in the upper right corner.
The point is that users should confine themselves to copying, pasting, and saving.
Other key-based operations can be performed, but using those that are not mentioned here may damage the tool. For example, cutting by pressing the "Ctrl" key and the letter "X" at the same time and then "Ctrl" + "V" to paste will destroy Stops because the algorithms within Stops will become confused. Therefore, errors will be generated and the damage to the tool will likely be permanent. Inserting, deleting, or re-arranging cells will permanently damage Stops. NEVER use the "cut" function by pressing the "Ctrl+X" key combination. Experienced spreadsheet users know a variety of key strokes that will permanently destroy Stops. Hopefully, the absence of a command ribbon will be a reminder that those operations should be avoided.
If you cannot function without the excel ribbon/menu, then you might be better off using our other stop loss calculator. We call it Stops. It has the ribbon/menu because it does not require the user to enter any data at all. In fact, it does not permit the user to enter any stock data. It already has within it data on thousands of stocks. It uses Reuter's database of about 8,000 stocks, but it filters out preferred issues and stocks that had zero volume. The only entries that can be made by the user are the settings he or she wants for the calculations. Hence, there is little danger that the user will damage the calculator.
ST Stops is different in that it enables the user to enter price data on any security, even for stocks not traded on U.S. Exchanges. It uses three days of data, while Stops uses 14 days. It is the ability to enter and delete data for any security that is the reason for removing the ribbon/menu from ST Stops. That is because carelessness in performing those operations, or attempting to format or add columns or rows, or any attempt to sort a column, can permanently damage the clculator. Also, ST Stops has macros to enable Excel to do things that would not otherwise be possible. Removing the ribbon adds a measure of protection for those operations.
In practice, you would select the setting that you think is most suitable for your purpose, and note the figure in the "Points" column. You can then finetune your setting by adjusting your multiplier until the points column figure is right for you. Whatever figure you choose, it will be based on the actual price action of the stock and its volatility. Your adjustments simply weight the effect of the stock's volatility to suit your own tolerance for risk (how much you are willing to let a stock decline before pulling the plug). To see the core figure that the calculator is working with, set the multiplier to "1." That will show the maximum price range during the last three days.
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