Welcome to the Friday edition of FutureSource.com's FastBreakTM.
Today's author is Jason Alan Jankovsky, an experienced derivatives specialist. Trading extensively in leveraged transactions since 1987, he is self-taught and self-educated. He has authored several trading systems, trained other successful traders and his numerous articles on global cash FOREX have appeared in "Financial Services Journal Online". [more] |
Using Stop-Loss Orders
Every trader has had the frustrating experience of placing a stop-loss order too close to the market. It really doesn't matter if the stop was to exit a losing trade or a winning trade, the frustration comes from having the stop get elected and then shortly thereafter the market continues to advance in the intended direction. You either have taken a loss that could have been a gain or cut a profit short. Of all the issues required to develop my trade approach, I probably have spent more actual time on the issue of improving stop placement than anything else. |
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If you look into the psychology of the stop issue I think this can give us great clues as to how we as traders can improve our use of stops. First of all, stops are not optional. The absolute surest way to suffer a debilitating drawdown in your equity is to trade without stop protection. This includes "mental stops" in my opinion. The purpose of a resting stop-loss order does not have to be solely to exit an existing trade; it needs to be considered as part of a well thought out trading approach that includes the understanding that no
trader knows it all. If we are willing to admit to ourselves that we cannot know for certain if any one trade will be a winning trade then your use of stops is simply an admission of that fact.
You as a serious trader must always have a protective stop working in the market you trade; regardless if you intend that to be an exit order for an open trade you currently have on for today. At the very least, a resting "get me out" stop working against your open trade insures that if for whatever reason you miss something before you exit the trade or enter an overnight stop; you are protected. As most traders know, it is the one time we act with enough over-confidence to assume we don't need a stop this time or will place that stop at the end of the day that our market runs away against us dramatically. Always place a stop-you can always adjust it later as the
trade progresses. |
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Next, stops are best thought of as profit management tools rather than risk control tools. For the most part, if you have developed a sound enough approach to identifying the market's order flow, when you are on the right side of the order flow your trade will work; you could almost say that the initial risk control secured by the first protective stop was immaterial. That stop might as well have never been there. But seeing as you are using solid discipline to protect yourself, once the stop is not needed as a risk control tool as the
market goes your way; your stop now becomes a profit management tool. Regardless of your personal trading style or timeframe, you will have the market "inhale" and "exhale" while the price advances toward your initial profit objective. That ebb and flow in price action is normal and expected.
The last thing you want to do is place your stop too close to the market to get tagged during this normal ebb and flow. Rather than roll a protective stop under the market to lock a profit; consider rolling your stop to a breakeven point and wait for the objective to be reached. If you have truly seen the order flow, and you are positioned fairly well to begin with, the probabilities of the market trading your entry price after an advance in your favor drops over time. After you have a reasonable lead on the market and you are holding a risk-free trade your only need is to watch for something to change.
If nothing is changing continue to let the profit run until your objective is reached. If something changes you simply exit the trade with what you have in it at that point. If something changes, and you don't see that change fast enough to exit with what you have, your breakeven stop will take you out with no damage to your equity. If you had aggressively rolled the stop up behind the market, and been taken out on a normal ebb and flow of price action, you might be tempted to re-enter the trade at a less than optimal time/price relationship; which increases your risk. |
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| I think the final benefit to always having a stop order working and using them less aggressively is the freedom of mind you have from knowing you are trading in a disciplined manner. Your trade thinking improves when your initial risk is known and protected. Your profit potential improves when you allow the market to behave as it needs to on the way to your objective. By simply adjusting your use of stops to a less aggressive and more disciplined manner your profit potential is the real main benefit because your losing trades are always
going to be there. Using stops less aggressively on your winning trades allows you to hold winners a bit longer. Using stops consistently to begin with limits your equity loss to a more reasonable number until you are holding the winner. |
About
the Author
Jason Alan Jankovsky, experienced derivatives specialist. Trading extensively in leveraged transactions since 1987, he is self-taught and self-educated. He has authored several trading systems, trained other successful traders and his numerous articles on global cash FOREX have appeared in "Financial Services Journal Online". Born and raised in Chicago, he has spent time in Europe prior to the birth of the Unified European Currency and is considered to be an unofficial authority on the EURO; often speaking at round-table discussions
within the industry including "The Las Vegas Moneyshow"and "The New Orleans Investment Conference", founded by Jim Blanchard. He is an avid Sailor and Private Pilot. |
For
Our Fast Break Readers
Disclaimer
The Commodity Futures Trading Commission has asked us to also advise you that trading futures is not without risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invested. Of course, that's not unlike most other businesses. But informed traders are the best traders! Opinions expressed by Fast Break authors are not those of FutureSource.
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The deepest secret for the trader is his ability to subordinate his will to the will of the market.
-Jason Alan Jankovsky
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