Why define the exit before entering
Deciding with the trade open and the price moving is when you decide worst: you hold what loses and sell what wins. Setting the levels beforehand takes emotion out of the equation.
Everything starts with volatility
An asset that moves 5% a day needs a wider stop than one that moves 0.5%. ARIA measures daily volatility from the last 20 closes. Without measured volatility, there is no purchase.
The four levels
- Stop: the price at which you exit to limit the loss. It is computed from volatility and bounded between 1.5% and 10%.
- Target: twice the stop distance. You risk one unit to seek two.
- Lock: when the position gains one unit of risk, the stop moves up to the entry price. From then on, the worst exit is breaking even.
- Horizon: two days for crypto, two exchange sessions for stocks. If the thesis does not play out in that time, you exit.
Size matters as much as the level
Position size is computed so that, if the stop is hit, the loss is at most 1% of the balance. A wide stop means a smaller position.
What a stop does not solve
A stop does not guarantee the exit price: if the market gaps or liquidity is thin, you sell worse than set. And a tokenized stock can have less liquidity outside New York exchange hours, which is why ARIA does not sell on time while the exchange is closed.
All of this, today, is tested on fictional portfolios: how ARIA works. General information, not investment advice.
General information, not investment advice. Investing carries risk, including losing the money you put in.