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I would probably agree with Bill about where to place stops but I
completely disagree with holding them out of the market. In my opinion,
they should be physically in the pit and waiting. Frankly I am proud of the
fact that it has been 15 years since I took a position without a physical
stop waiting behind my trade.
Maybe that just comes from my being paranoid, but I have seen markets (I
trade about 95% bonds) move so fast against a position that by the time you
pick up even a direct line you already have a market that is a significant
distance away from where you intended to get out. I do have to admit that
overall the bonds have been easier to handle over the last few years... but
you still have to avoid the big problem (Larry Conners calls it "Managing
the bad Tail").... stops are an essential exercise in discipline to keep
you alive and trading.
Two points: 1) I prefer market based stops. I always hide my stops a short
distance above or below a significant support or resistance. 2) The first
thing I consider when putting on a trade is, Where will I stop out at? If
the stop is too far away from my entry point... I just don't do the trade.
3) If you have a problem with your stops getting hit to often (as a market
sets an extreme), you need to work with your entry techniques a bit. Wait
for either a washout of the supp/res level (when everyone else gets their
stops run) and then enter or wait for thrust in the direction of your trade
(worse entry point but less risk). A good example is found in yesterdays
bond chart. The old support at 113.25 was violated, running stops and
inducing breakout trades, as soon as the stops were run the market turned
on a dime and rallied back above the breakout point. The rally back above
the breakout point (plus a small fudge factor) allowed you to enter a
market where the stops had already been run.
This is one time when an oscillator can help you a bit. If the market
approaches a strong support but is already oversold, odds become quite good
that a breakout will be false (I use a very slow moving oscillator and
price channels for overbought and oversold). I like to judge short term
overbought and oversold in terms of the hourly chart. 4) Learn to read the
tape. Price action will allow you to recognize the point of danger beyond
which, if you are right, the market should not move.
This has rambled on and I don't mean to demean anyones trading style.
There are tons of ways to skin the trading cat. I will tell you, most of
the really good traders that I have met (and since it's my business I have
met quite a few) wouldn't consider trading without a physical stop. ON THE
OTHER HAND: I have known a few really good traders who never use a physical
stop and are quite successful. I personally think they take too much
risk... but that is my opinion.
Anyway, my two cents.
Stewart.
>In a hugely liquid market like the T-Bonds, it is important to use stops,
>but not in the market. The measured tread on the one hand and the
>potential extreme range on the other allows this - provided you have good
>communications with your broker and you are only in the market at the right
Stewart Taylor
Taylor Fixed Income Outlook
Voice: 501-219-9774
Fax: 501-228-0963
E-Mail: staylor@xxxxxxx
Web Site: http://www.cei.net/~staylor/
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