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Stop placement is where we separate the kids from the adults. Stop placement is the sole responsibility of you as the manager of your trading business. It is one buck that you cannot pass.
You are the end of the line when it comes to placing stops. Let me show you why you, and only you, can decide where to place the stop.
There are several considerations:
The size of your margin account has the greatest effect on stop placement. When you look at a trade and see where the stop should go, or where you would like it to go, you then have to look at the size of your margin account and determine whether or not you can even consider the trade.
Your comfort level
Although you may have sufficient margin to place the stop where you would like to, and although the stop is logical for the trade, you may not feel comfortable with the stop being so far away (or even so close), and so you will decide not to take the trade with the stop far away, or move the stop back if it appears too close.
Volatility
You must take into account market volatility when placing your protective stop. If a market that normally ticks two ticks at a time suddenly begins to tick five ticks at a time, you must certainly take the level of volatility into consideration. You may find out that you have to place your stop too far away for the size of your bank or your comfort level.
When you use mental stops, there are two other considerations which you must ponder when placing your protective stop. They are: Your speed in placing the order, and the speed at which your broker can place the order. Let's look at each.
The speed at which you can place the order
This depends upon how fast you think on your feet. There are three factors here: Perception, decision, and action. How long does it take you to perceive that NOW is the time to pick up the phone and place your stop in the market if you are calling the broker? Or, NOW is the time to enter your stop via your electronic trading platform?
Then, once you make the perception, how long does it take you to decide to do something about what you have perceived? Are you quick to decide upon your perceptions? Finally, are you quick to act once you have made a decision?
Some of us are very quick in all three areas. Some of us are too slow to utilize mental stops. Only you can tell from the experiences you are having in the market whether or not you are quick enough to use mental stops.
Other factors that can enter in are based upon your trading environment. Whether you trade at home or at the office, if you are subject to interruptions, you dare not use mental stops.
If you are calling a broker, the speed at which your broker can place the order depends upon his organizational setup. If you have a broker who is a "chatty Charlie", watch out. Even though he may not be chatty with you, he may fool around with getting your order in while he chats with one of his other clients.
If your broker is one who trades a lot, he may be taking care of his own before he gets around to taking care of yours. Other considerations are: Whether or not you are able to call directly to the trade desk on the floor, and better yet, whether you can call directly to someone stationed next to the trading pit.
When calling a broker, if you are using mental stops, you should time your orders. Find out how long it takes from the time you reach for the phone until you hear that you are filled. Test this procedure in several markets on several occasions.
If you are using electronic order routing the speed at which you can electronically place an order depends upon the speed and reliability of your computer, the Internet, your data feed, your broker's computer and routing system, and the exchanges computer system.
If using the telephone to call in orders, you may want to use the "tick-in-half" rule. For every 1/2 minute your order takes * from the time you reach for the phone until you get your fill * add one tick to your mental stop. If this is satisfactory slippage, then it's okay for you to use mental stops. Time these as flash fills since your mental stops should be market orders.
These days many people use all-electronic trading. Neither the broker nor electronic order routing is involved in the trade. Fills are virtually instantaneous.
The number of trades you already have on in other markets can have an effect upon where you place your stop. If you are already pretty well margined-up, you may not be able to financially, or comfortably, afford to put on another trade with the protective stop in the place you feel right in having it.
In that event, it's best to pass this trade, or liquidate another trade so that you can comfortably enter the one you are contemplating. Remember, if you overtrade, put on too many trades, you will get into trouble and have to place your stops too close.
There are other considerations that may be involved in special situations, which affect where you will place your protective stop, and whether or not you want to take the trade when you see where that stop will be.
The main point is, if you can't place the protective stop where it should be, don't enter the trade. If you truly don’t know where to put the stop, then why you are trading at all is a valid question.
I think that from the previous discussion you should be able to see that protective stop placement takes a good deal of planning and thought. It's part of what you do the 85% of the time that you are a trader.
Remember? The markets trend or swing only 15% of the time. If you like to trade trends and swings, you should be trading only 15% of the time. The other 85% of the time you should be planning, organizing, delegating, directing, and controlling. That is what a good manager does. Inherent in owning and operating your trading business is proper management.
About the Author
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Joe Ross, trader, author, trading educator is one of the most eclectic traders in the business. His 48+ years include position trading of shares, and futures. He daytrades stock indices, currencies, and forex. He trades futures spreads and options on futures, and has written books about it all - 12 to be exact. Joe is the discoverer of The Law of Charts™, and is famous for the Ross hook™ and the Traders Trick Entry™.
His website: http://www.tradingeducators.com/ |
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