What are AON, Bar by Bar and ATR by ATR Stop Loss Orders?
George Soros, The famous Hungarian-American billionaire, legendary investor, and trader once said,
"In trading, it's not about being right all the time; it's about managing your losses when you're wrong."
Wonder why he said that ?
Because Soros understood that no trader can always be right, and although there are methods to deal effectively with trading losses, One thing is certain,
They are unavoidable in the market.
Therefore, he emphasized the importance of focusing on effective risk management strategies.
By prioritizing risk management and minimizing losses when trades go wrong, traders can protect their capital and remain in a position to capitalize on future opportunities.
And there is no better mechanism of minimizing Losses than using The Stop Loss Orders
In the Blog Post below, we will discuss some of the advanced-level stop Loss Orders and how you can master these stop adjustment methods to enhance your trading strategy and lead to more successful trades.
So, let's jump in and discover how to fine-tune your stops for optimal results in intraday trading!"
What is a Stop Loss Order?
A stop-loss order is a type of order used in investing to limit potential losses on a trade. It instructs a broker to automatically buy or sell a security once the price reaches a certain level, called the stop price.
Stop-loss orders help you cut your losses if the market moves against you.
Further,
By automating the selling process, stop-loss orders can prevent you from making impulsive decisions based on emotions.
Therefore, Understanding the Stop Loss Order is essential to apply them to the orders correctly.
Stop Loss Orders can come in various types,
Here are some of the more advanced versions
1) All or Nothing (AON) Stop Loss Orders
An all-or-nothing (AON) stop-loss order combines the features of a stop-loss order with an all-or-none (AON) order.
It instructs your broker to sell your security (or buy to close a short position) once the price reaches a certain level (stop price), similar to a regular stop-loss order. This helps limit potential losses.
However,
Unlike a standard stop-loss order, an AON stop-loss order requires the entire order to be filled at once. If there aren't enough shares available at the trigger price, the entire order is canceled.
The benefit?
It prevents partial fills
This can be useful for illiquid securities (securities that don't trade frequently) where you might not want to risk selling a portion of your holding at a potentially unfavorable price.
It also ensures specific position sizing:
If you want to exit your entire position in a particular security, regardless of price fluctuations, an AON stop-loss order can help achieve that.
But there are some drawbacks as well.
There is potential for missed exits
Since the order gets canceled if not filled entirely, you might miss an opportunity to exit your position if the price rapidly falls below the stop price but doesn't find enough immediate buyers for your entire holding.
There is also a lower-order fill probability
AON stop-loss orders can be trickier to get filled, especially for larger holdings or in volatile markets.
For Example
If a trader buys a stock at $100 per share and sets an AON stop loss at $95, they will sell all of their shares if the price falls to $95 or below. This means that if the market moves against their position and the price drops to the predefined stop loss level, the trader exits the entire position, preventing further losses.
2) Bar By Bar Stop Loss Orders
A bar-by-bar stop-loss order, also referred to as a one-bar or one-candle stop-loss, is an aggressive exit strategy used in trading. It dynamically adjusts the stop-loss price based on the most recent price movement, following each individual bar or candle on the chart.
For Long positions, The stop-loss is placed just below the low of the most recently completed bar/candle. It essentially trails the price upwards as long as the price keeps moving in your favor.
For Short positions, The stop-loss is placed just above the high of the most recently completed bar/candle. It trails the price downwards as the market moves against you.
With every new bar closing, the stop-loss is recalculated based on the new low (long) or high (short) price.
This approach gives several Benefits
The First benefit is
The Quick profit lock-in
By trailing the price closely, a bar-by-bar stop can help you lock in profits rapidly as the price moves in your favor.
It also
Reduces emotional trading
Automating stop-loss adjustments removes the temptation to hold onto losing positions hoping for a recovery.
But there are certain drawbacks as well.
The First one is the
Increased risk of getting stopped out
The tight following nature of this strategy can lead to frequent exits due to normal market fluctuations, potentially taking you out of a trade prematurely. This can be particularly risky in volatile markets.
It can also lead to
Missed potential gains
If the price makes a small pullback before continuing its upward trend (for long positions) or downward trend (for short positions), the stop-loss might get triggered, causing you to miss out on further profits.
For instance,
let's assume the stock price in our previous example rises to $110 per share. At this point, the trader decides to adjust the stop loss level higher to protect the profits gained. They may choose to set the new stop loss at $105 per share, maintaining a $5 distance from the current price.
If the upward momentum continues and the stock price climbs further to $120 per share, the trader may further adjust the stop loss level upward. In this scenario, they might set the new stop loss at $115 per share to continue trailing the price action and locking in additional profits.
However, if the market suddenly reverses, and the stock price starts to decline, the stop loss remains in place to protect the gains achieved. For instance, if the price drops to $115 per share, the trader's stop loss at $105 per share would be triggered, allowing them to exit the trade with profits while minimizing losses.
Overall,
This strategy is best used in conjunction with other technical analysis to identify strong trends and avoid getting whipsawed by short-term price movements.
3) ABA (ATR By ATR) Stop Loss Method
Although , we know How to Calculate Stop Loss Using an ATR Indicator,
ATR by ATR" in the context of stop-loss orders refers to a method where you use the Average True Range (ATR) indicator not just once, but iteratively, to set a dynamic stop-loss level.
In this method, you first calculate the ATR for your chosen timeframe (e.g., 14 days) based on the price history.
But Instead of using a fixed multiplier of the ATR (e.g., 2x ATR), you set the stop-loss a certain ATR away from the previous day's closing price.
As each day (or your chosen time period) closes, you recalculate the ATR based on the most recent price data.
You then adjust the stop-loss level by the new ATR value relative to the previous day's closing price.
Essentially, the stop-loss level keeps adapting based on the changing volatility of the market, as reflected by the ATR.
The Biggest Benefit of this approach is
It Adapts to volatility
This method avoids setting a fixed stop-loss that might be too tight in low-volatility periods or too loose in high-volatility periods.
You can also place tighter stops
Compared to a fixed multiple of ATR, this method can allow for tighter stops in calmer markets, potentially limiting losses.
But beware of
Increased complexity as this method requires more calculations compared to a fixed ATR stop-loss &
There is also a
Potential for whipsaws
Frequent adjustments based on short-term volatility might lead to getting stopped out due to minor price swings, especially in choppy markets.
Example:
Let's consider using an ATR by ATR stop-loss order with a hypothetical trade on Tesla (TSLA) stock.
Let's say you decide to buy 100 shares of Tesla (TSLA) at a price of $1000 per share on Monday. You want to use an ATR by ATR stop-loss with a daily update to manage your risk. Looking at the past 14 days (or your preferred timeframe), you calculate the initial ATR for TSLA to be $20.
So,
Instead of a fixed multiple of ATR, you decide to place your stop-loss $10 (or 0.5x ATR) below the previous day's closing price. Since you bought on Monday at $1000, your initial stop-loss wouldn't be triggered unless the price falls below $990 (1000 - 10).
At the end of each trading day, you'll need to recalculate the ATR based on the most recent 14 days (including the new day's closing price) & update your stop-loss level by the new ATR value relative to the previous day's closing price, maintaining the $10 buffer.
Let's say on Tuesday, TSLA closes at $1020. You would then recalculate the ATR using the new price data, and for this example, suppose the new ATR is $25.
Your stop-loss would then be adjusted to $1015 (1020 - 25 - 10), which is $5 lower than your initial stop-loss because the ATR increased, indicating higher volatility.
Remember:
This process would repeat daily, with the stop-loss automatically adjusting up or down based on the closing price and the new ATR calculation.
4) Combination of ABA (ATR By ATR) and BBB (Bar by Bar) Stop Loss Order
Now this is a creative combination of two stop-loss strategies we have described earlier: ATR by ATR and Bar by Bar.
This strategy utilizes two separate stop-loss orders with different functionalities:
Our First Target is ATR by ATR Stop-Loss
This aims to lock in profits gradually as the price moves in your favor. As the market volatility changes (reflected by the ATR), the stop-loss level adjusts dynamically.
Our Second Target is Bar by Bar Stop-Loss
This acts as a tighter safety net to prevent getting stopped out by minor price fluctuations, especially after locking in some profits with the ATR by ATR stop-loss.
Here is how it works
You enter a long position (buying) or a short position (selling) on a security.
1st Stop-Loss (ATR by ATR): You place a stop-loss order with an initial distance from your entry price based on the ATR calculation (e.g., 1x ATR below your entry for a long position). This stop-loss will be adjusted daily (or your chosen timeframe) based on the new ATR value.
This stop-loss gets triggered if the price falls below the dynamically adjusted level based on the latest ATR calculation. This helps lock in profits as the market moves favorably.
2nd Stop-Loss (Bar by Bar): This stop-loss is initially deactivated.
Once the price reaches a certain level (potentially your first profit target or another pre-determined point), the Bar by Bar stop-loss becomes active. It trails the price on a bar-by-bar basis, typically placing the stop-loss just below the low of the most recently completed bar (for long positions) or above the high (for short positions).
Did you see its Benefits?
This approach adapts to Volatility. The ATR by ATR stop-loss helps you capture profits as volatility increases.
The Bar by Bar stop-loss provides a safety net after locking in some profits, potentially preventing unnecessary exits due to short-term price swings.
But but but,
Managing two separate stop-loss orders requires more attention and potential adjustments.
& there is also a risk of Missed Profits
The Bar by Bar stop-loss could lead to exiting a trade too early if the price makes a small pullback before continuing its upward trend (long position) or downward trend (short position).
Example: Trading Apple (AAPL) with ABA-BBB Stop Loss Orders
Let's imagine you're considering buying shares of Apple (AAPL) on Monday and want to implement an ABA-BBB stop-loss strategy.
You decide to buy 100 shares of AAPL for $200 per share on Monday. You calculate the initial ATR for AAPL over the past 14 days to be $10.You set your initial stop-loss 1x ATR below your entry price, which is $190 (200 - 10).
Throughout the week, the price of AAPL fluctuates. The ATR by ATR stop-loss adjusts accordingly based on the changing volatility.
This stop-loss will be a trailing stop-loss order that adjusts daily based on the new ATR calculation.
The 2nd Stop-Loss (Bar by Bar) is initially deactivated.
But on Wednesday, AAPL price rises to $220. You decide to activate the Bar by Bar stop-loss at this point, considering it a good profit level.
The Bar by Bar stop-loss is set just below the low of the most recently completed bar (let's say $215 for this example).
Now, there can be two situations going forward
Scenario 1: Continued Uptrend
AAPL continues to rise in the following days. The Bar by Bar stop-loss also keeps trailing upwards, automatically adjusting with each new bar's low. This allows you to capture further profits while maintaining a safety net.
You eventually decide to exit the trade manually at a higher price point when the trend seems to be weakening.
Scenario 2: Price Pullback
After activating the Bar by Bar stop-loss at $215, AAPL experiences a pullback.
If the price falls below $215 and triggers the Bar by Bar stop-loss, you exit the trade with a profit but might miss out on further gains if the price eventually resumes its upward trend.
Remember that
successful trading requires a combination of factors beyond stop-loss orders, such as proper entry signals, position sizing, and overall risk management practices.
The Bottom Line
AON, Bar by Bar, and ATR by ATR stop-loss orders are basically different ways to set limits on how much money you can lose on a trade. AON gets you out completely at a specific price, Bar by Bar follows the price action closely to exit quickly on small moves, and ATR by ATR adjusts based on how volatile the market is.
There's no perfect choice - the best one depends on how you like to trade and how much risk you're comfortable with. By understanding these tools and incorporating them into your trading plan, you can become a more confident trader with a better handle on keeping your losses in check!
Trade Smarter!
