The stop loss simple is an issue which prop firm traders enjoy talking about, often passionately. The distinction between having a bad day and destroying a funded account is determined by that tiny line that is drawn in the sand. A well-planned stop-game is vital to survive especially when dealing with things as fast and volatile like S&P 500’s futures.
Making a stop loss is more complicated than just entering a random number and then crossing your fingers. It’s much more critical to be able to do it correctly when you are in a prop trading scenario in which you are not just managing your trades but protecting the company’s assets (and the likelihood of getting it).
Let’s talk about how to build smart stop losses to S&P 500 Futures that can be prop firm-ready.
Why Stop Losses Are a Non-Negotiable in Prop Firms
A majority of them come with tight daily drawdown limits as well as trailing drawdowns. profits targets that you must keep within a certain risk tolerance. Your assessment or your bank account with a financed balance and your faith could be ruined through one or two massive losses.
A safety net which keeps you from falling fast is a correctly established stop loss that is properly set.
Beyond that, using stop losses shows your company that you are an expert. It proves that you’ve got an approach rather than simply a “let’s see what happens” mentality.
Also, stop loss involves more than the management of money. They’re about managing the trust of others.
The Nature of the Beast: S&P Futures Are Fast and Feisty
Options for futures on the S&P 500 are different from the other. They are moving quickly. Sometimes, they move very fast, especially during FOMC announcements, economic data, announcements, and market openings. It is possible to be under water in one minute, and then up by five points the following. Because they’re leveraged products and leveraged, your account could be greatly affected by one minor change.
This is why deciding your stop loss is more than simply speculating on an amount. All it boils down to being able to adjust to the market’s rate and composition as well as the atmosphere.
Know Your Risk per Trade
Before you determine the best place to stop first, you must decide how much you’re willing to put at risk.
Futures prop firms typically offer traders a general rule of thumb similar to one percent to 1% or less from your account for each trade. If you’re in the review phase, with an account that is $50,000 and the daily limit for loss is $2,500, putting more than $250 in one trade could lead to trouble.
Here’s a quick outline:
- The size of the account is $50,000.
- Maximum daily drawdown Maximum daily drawdown: $2,500
- Risk per trade: 0.5% = $250
For the exchange ES (E-mini S&P 500 futures) every point is valued at $50 for each contract. This means that if you’re taking on $255, your limit could be five points or less in the event that you’re trading only one contract.
This type of math ought to be second to. Put the math on your computer, if you need to.
Different Approaches to Placing Your Stop
When you’ve figured out the risk, you’re able to determine how to put your stop. There isn’t a one-size-fits all solution here. It’s all about your personal approach, your style, and how you feel about pain.
Technical Stop Losses
It is the most commonly used method for prop trading — using levels of technical analysis to help you decide where your stop should be placed.
Think:
- Previous swing highs and lows
- VWAP
- Levels of support/resistance
- Trendlines
- ATR (Average True Range)
Let’s suppose you’re shorting the ESM at a critical resistance level. Price has tested it three times before rejecting each time. You decide to go at the lower end of that resistance. It’s great. But where is the stop?
You don’t want to put it in the exact spot against the resistance. It’s the place where everyone else puts theirs, and you’ll be thrown out before the actual move gets started.
You could place it just a few points or ticks over that threshold, enough to allow for the noise, yet still secure enough to respect your risk limit.
A tip to follow: use the ATR to allow yourself some breathing room. When the ATR for 5 minutes has 2.5 points, putting one point further away from the stop is as if you were standing in the ocean with shoes on, expecting to not get wet.
Time-Based Stops
Some prop traders make use of time as an excuse to leave — particularly scalpers and momentum traders.
The reason? “If this trade doesn’t move in my favor within X minutes, it’s probably not gonna work.”
You decide to set your mind (or difficult) stop that is not based on price, but on.
The kind of stop you’re using doesn’t safeguard you from major movements against you, which is why it’s usually paired with a conventional price-based stop. It’s still a great device to stay out of the way in a tense swath of chop.
Volatility-Based Stops
This technique adjusts the size of your stop based on the volatility of the market.
Let’s say that the market is in a frenzy — massive 10-15-point candles and news events soaring. If you’re using a tiny 2-point stop as you would in calm weather, you’ll get whipped all day.
Therefore, you should scale your stop loss based on fluctuations, usually by using Bollinger Bands, ATR or other custom-made measures.
In a steady market the stop could take 3 points. If you’re in a volatile market perhaps it’s 6, or 7. The most important thing is constant percentage risk even if the size of your stop changes the risk of your dollar should remain the same.
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