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I have to agree with Stewart on this one. Having actual stops in place
in the market is a must - for protection against severe adverse market
movements AND for protection against yourself. If stops are determined
BEFORE you enter a position you do it in a much more objective state
of mind. After-the-fact stop considerations are prejudiced by wishful
thinking. There is a natural tendency to give the trade more room to
breathe than you should because you don't want to be proven wrong.
As a matter of fact, in regards to the mechanics of trade entry, the
stop is the first factor that I consider. If it doesn't look like I'll
be able to get in within a reasonable distance from my stop, I don't
take the trade. I know that there will be plenty of other
opportunities to come along where risk is within more reasonable
tolerances.
With that said, It is rare that I actually let me stops get hit. Most
of the time, the market lets you know very quickly whether your trade
is working out or not - either through price movement or time
considerations. Time is a critical factor that works AGAINST a
successful trade if the market decides to lolly-gag.
Bob Hunt
E-Mail: RHunt.066@xxxxxxxxxxxxxxxx
Web Site: http://home.att.net/~rhunt.066
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Stewart Taylor wrote:
>
> 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.
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