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Before the glasshouse people throw too many stones, let me clarify my
position on stops, without I hope adding further to a subject I had want to
close, so far as I am concerned.
First and foremost, I trade with stops. I advocate stops as an essential
part of trading. I do hope that is clear.
That said, I only have a different view from those who like to place their
stop actually in the market at the time they take the trade, because of the
way I trade a very particular instrument. For the sake of those who think
I have a 'closed mind' or for those who should be wary of my 'rap' or
consider my attitude 'sucks the big one', let me clarify my trading style.
This will be short(ish!), but before I start, please appreciate that just
because it is my style, does not mean that I am arrogant or that I consider
it the only way to trade. I state that because I think that one of the
objects of RT is to exchange ideas, concepts, etc. If you choose to
disagree, that is very much your privilege - as indeed it is to put your
opposite or different point of view. But it can be done civilly, politely
and factually, can't it?
Also, I am only talking about day trading the bonds, as I have found that
instrument.
All my trades have a stop worked out before I place the order. But that is
based on the market as it is at that moment. While the stop is inviolate
when hit, the actually execution of it will depend on market factors - but
the decision has been made! The fact is that my stop rarely gets hit
because I am usually out well ahead of it, because of the manner of my
trading. I very frequently have a profit stop, but as a limit order.
When I am in a trade I am watching every tick. I am following the market
very carefully against the criteria I use, against my r/r/r, etc. (If I
get interrupted and cannot continue for any reason, I come out. I would
not leave a stop in the market and hope, as I use a discount broker for
very low costs and cannot expect the trade to be followed for me.) Of
course it is not an infallible method, but it works very well for me. Now,
how do you protect against the sudden disaster? The point I was trying to
make, but obviously did so badly, was really two-fold.
I have found that the nature of the bonds is such that even on large
swings, the market stops and stalls enough to get out with maybe an
uncomfortable, but acceptable loss. It has to be said that from my own
trading experience these sort of moves tend to be windfall profits, rather
than losses - so when you get the loss you have to stomach it!
The second disaster is the big move in a matter of seconds. These are
always at Report times and coupon passes and I am never in the market at
those times. The sudden Ruben situation will normally put itself right
within a very short time frame. If not, you have to take the loss. But
will someone with Trade Station and all sorts of whiz ways of back testing,
kindly post the largest recorded move for the bonds, where there was not a
stall or breathing spot to have exited on. What is the most the bonds
have moved in a day? When was the bonds limit down last? Just when? I
have never experienced it!
Now, following on from that. If you have one of these major moves and
suppose you have your normal stop in, say 4, 6 or 8 ticks or whatever, just
where - with the market moving in 'fast market' conditions is your stop
going to get filled. If the market has blown clean through it, where will
it stop and let you get filled. Where? Just how much protection is your
stop giving you? It is probably only an option which can help in such a
situation.
Of course, normal stops get filled very easily - usually in the bonds at
that price, on the nose. Fine, if that is how you want to trade, go for
it. By the same token, I can get my price for my stop, the way I do it,
so I am happy. But on a long stop basis, we are both unhappy. The market
goes straight through the stop. You get a lousy fill and I may do the
same - or not, as the case may be. What is important is that because you
are trading the bonds, you know before you start what the average range is,
you know the theoretical worst case average - if you sat there and did
nothing to mitigate the situation from 7.20 to 2.00pm.
Anyway, if my point is not clear in this 'short' essay, then I cannot do
more. The point is that I trade with stops - not usually in the market -
most of my executions are limit orders and my style has eliminated as much
as I can the 'fast market' conditions where, in my view, a stop is waste
confidence.
Now, if all that gives offence to someone, I apologise in advance. If it
genuinely helps just one person to see what I am getting at and helps them
to get more from their trading, then I am very pleased to have taken the
time. But now, on a Saturday morning, I have a mass of other things to
do. So have a good week-end all.
Bill Eykyn
www.t-bondtrader.com
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