A Look at Larry R. Williams' Market Trading

Focus on Williams' Trading Philosophy for Setting Trading Stops

Mar 10, 2009

In 1987, Larry Williams turned $10.000 to $1.1 million in a highly publicized real time trading championship. Many traders are now adopting his trading ideas.

Larry R. Williams (1947 - ) is an American stock and commodities trader. His contributions to technical analysis include the invention of a number of popular technical indicators:

Williams published a few financial markets books and has written for a number of trading publications, such as: Active Trader, Futures Magazine, and Technical Analysis of Stocks & Commodities.

An important part of Williams' success is the correct use of stops to control risk. Williams, a master trader, strongly advocates the use of stops by all traders. The following are edited excerpts from his trading book (ref 1), indicating the wisdom and insights of using stops.

Where to Place Trading Stops

A previous article examined the setting of stops and another, some methods of setting stops. Williams also believes that stops are essential and the most common method of placing stops revolves around prices breaking through what should have been a support area. This is certainly nothing new. If prices fall below yesterday’s low, or the lowest low of the last four days, many “systems” would stop out. Common to other traders, Larry Williams’ method uses stops, based on price and time.

Trading Stops Based on Price

When carefully studying a chart and searching for a stop point, the trader must realize that others are doing the same thing. The rest of traders will usually place stops slightly below the support area. Realizing this, Williams places his stop a little lower than where he suspects other people have placed theirs.

A second price method is to limit risk to no more than an upper, fixed dollar value. This method is ideal for the system trader of beginner.

Trading Stops Based on Time

A trader can also stop out of a trade if the trade does not perform within a certain amount of time. Williams suggests a four-day time period is the optimum time span to use for time stops. If the market has not moved within this time, then risk is significantly increased.

Using Mental Trading Stops

Many traders say they use mental stops. This means the trader begins selling once the market reaches the mental stop level. One advantage of doing this lies in the fact that only the trader knows of this position and it is not visible to floor brokers.

In general, traders have not used mental stops successfully. As when prices “smash down” to the mental level, traders begin to re-evaluate and, in the process, fail to use the mental stop.

The copyright of the article A Look at Larry R. Williams' Market Trading in Investment is owned by Harry P. Schlanger. Permission to republish A Look at Larry R. Williams' Market Trading in print or online must be granted by the author in writing.