Designing a trading system has some abstract requirements. Something must provide potential and some other thing safety. Betting on a trend is probably the best method to tap into potential, besides using insider knowledge or direct market manipulation. On the risk side of this abstract trading equation the right money management is a must. But that is not enough.
Using a stop loss technique is the cornerstone for most trend trading systems. But just putting the stop in place may also not be enough. Depending on your personal trading behavior, you may end up buying always a bit high and incurring many small losses. Widening the stop margin is not really the solution here. A better way may be to try to buy locally cheap but still in a trend.
Many people try exactly this and the result is that they wait for some cheapness, the pullback, that never comes and when it finally comes the trend reverses. Instead of waiting for a dip that lasts for some days, sort of a random trading method may be interesting.
Looking at charts of single stocks, tracking stocks like the QQQ and indices themselves reveal a remarkable thing. The indices move the smoothest, while the tracking stocks follow them more or less precisely but with a noise envelope overlaid. Individual stocks have their own price curve added on top of that. The movement of the whole market only shines through the noise and their own motion. But the index induced pattern is statistically still there.
A stop loss strategy needs an edge for the entry. If you can get into the market with a small statistical gain, slippage and fees will be no problem anymore. The long trend will then do its magic and propel a few of your investments to home runs that completely overwhelm these tiny entry fights.
The small statistical entry edge needed for a tight stop system, which produces many trial trades and few big gainers, could be hidden in these noise envelopes. Basically one would have to time the trade with the index, but differently then most people do it. Instead of waiting for a procyclical pattern like a breakout or reversal, then rushing into the desired stock and paying the highest slippage possible, do the opposite.
Look for index situations that do not suggest a movement into the wrong direction like a breakout to the downside or a downtrend when you want to go long a stock. Mostly the index will be in such a mood. Clear signals are rare. The wanted stock should of course not show a sell signal either.
Then enter a buy limit at, for instance, up to 1% below the current price for your stock. The random movements and swings may hit your limit while the index and the target stock look still stable. Statistically it should be possible to negate the slippage by a wide margin this way.
Directly visible is this often during an intraday uptrend of the index. The slightest pullback in the index or even a short rest may result in steep dips of single stocks caused by profit taking of day traders and manipulation of market making entities.
If the limit got hit in the moment something changed and the market has started to sell off and either the stock or the index shows a sell signal, sell immediately. That happens, but rarely.
All in all, this entry system could make stop loss trading being a lighthearted operation. And every now and then you will be rewarded for your happy trading style with a huge gain that absolutely doesn’t compare with these entry pennies. Perhaps it is even possible that exploiting this “dynamic spread trading” is profitable in itself.