Thursday, July 31, 2008

Placing stops on the trade

That is a very popular topic among traders - opinions vary widely.

This is my approach - the moment I enter the trade I ...DO NOT place stop loss order.
I've been a part of this deceptive exciting game called stock market long enough to know that HARD stops placed with your broker ( it does not matter that some brokers claim that "stop orders are kept on their in house servers" ) either present great additional chance to enhance stock movement by "locals" or it will shake you off on intraday noise. And don't forget - stop orders mostly set to fire on "bid value" and you will be wasting your time trying to prove to your broker based on Time&Sales history that there was no trade at "activation price" ( All it takes - lower the bid a notch and easy shares are in the Market Makers hands )

Another reason for not placing stops AFTER you acquired position is that in this case it signifies that BEFORE placing the trade, you, most likely, had NO IDEA about risk/reward on that trade - you MUST know STOP price BEFORE you place any trade, swing or day, long or short - PERIOD.

SO, what do I do?
It varies with market conditions - bull, bear or dead money market ( which is really - bear market of a kind) - but my general approach - before I place the trade I have a "Mental Stop price" - which, in MOST cases I WILL honor on market close ( or if it is a real short term trade - hour end or half an hour end )

There are advantages and disadvantages to this approach

No "shaken off on noise"
Better confidence in the trade - you have a plan
You are not glued to the screen all the time during market time ( as oppose to not having stops based on hourly or daily closes and just torturing yourself every second with eternal question - to close or not to close)
Also, since most of the traders really trade based on DAILY charts ( I use weekly as well and..don't laugh - monthly ) - is it prudent to close the trade based on short lived intraday movement?

You might have a loss as oppose to "noise reduction"
You HAVE to be capable to watch the trade at certain time of the day - so, no trading while boss is not looking - he might call you at 3:55 and in lamers terms you are ...well, you know )

Does this work? It works for me in this type of psychotic multidirectional lost in space market man made bear market.


P.S. I really long overdue with editing of

"Breakout play" interpreted


"My trading style"

posts written at the time of moderate Bull Market - I am getting quite a few emails ( I visually imagine raised eyebrows ) with expression of total confusion due to my current trades having nothing to do with what was described in aforementioned posts.