A little earlier I touched on some catastrophic risk. There is something that you must learn, beyond the question of doubt at some point. NEVER exceed your maximum risk. This rule takes for granted that you never trade without a stop loss. Come to think about it, maximum risk takes on a new meaning when trading without a stop loss.
Now some traders can accept this fact. Others have to learn the painful way. You are just going to get hurt enough until you learn this or the pain forces you completely out of the market. You cannot succeed without limiting your risk. You just can’t. And even if you are
the one in a million that makes millions doing it, you are probably not the rare “one of those” who can keep it.
If you find yourself constantly chasing this idea, and you can’t break away from it, you are in the wrong game. Try the World Poker Tour instead.
ALWAYS TRADE WITH A STOP LOSS, ALWAYS Stay at or below your MAXIMUM RISK.
Okay… I’ll move on.
Since we are on the subject of stop loss, I might as well talk about a couple of other stop loss ideas.
Moving Stop Loss to Break Even
This is probably a level 4 topic, but it could be a later level 3 topic. I’m going to stop short (he) of saying that you should not move your stop to break even. Maybe it will work for you. I get it. I did it for quite a while. The idea is that you are in profit, and you don’t want a winning trade to turn into a losing trade. Or maybe you are in a small profit and just want to eliminate the risk.
If you are in a small profit (say a few PIPS) and move your stop to break even (BE), you are going to be sorely disappointed by how often your stop gets hit. In fact you might find yourself trading for hours in many trades only to make nothing. Price fluctuates a lot in this market. So that makes no sense at all. Not to mention that your risk to reward ratio gets tilted. If you are moving your stop before you match your risk, you are violating a principle. This leads to smaller gain and bigger losses, and that hits your bottom line.
Okay now you could move your stop to BE once you reach .75:1 or 1:1. How does that work out in time? Your experience might be different, but here was my experience: I’d make money, and then move the stop to BE trying to get more money, and then half the time or more, price would come back and hit my BE for zero. So instead of making money each time I hit .75:1 or 1:1, I would just make zero.
So for me, in the end, I just became someone who would prefer to bank the money and look for another trade, instead of trying to get more and end up getting nothing.
That said, I can see there could be times you might move your stop to BE. Perhaps you are coming up on HID (not hyper volatile), and instead of closing the trade, you set it to BE. One time, I was half way to my target, and price stalled in a tiny range for a while. I didn’t want to close the trade, but I didn’t want to leave my desk with my trade at risk. So I moved it to BE. At least I wasn’t wondering if I was going to lose money while I was away. But these types of things really need to be defined into your plan. You don’t want to be making decisions “on the fly.” Remember that you can always “document” trades separately from your trading plan and try out anything you like.
Trailing Stop Loss
Trailing stops are sort of the same thing for me. Would I rather take the profit I have and look for another place to enter, or lock in some profit, and potentially lose some of what I already made? I can usually tell when price is getting exhausted and more likely to correct. Why not just close my position, wait for the pullback, and then get in again?
Then some traders like to close a portion of their position. So maybe you hit your first target and close half of the trade. Then you move your stop forward and see if you can let the profits run. If you are interested, you will just have to try it out and see how you like it. But I
suggest you do this AFTER you reach your first goal, which is consistent profit making.
Stops Hit by Variable Spreads
I touched on this before, but if you are using a broker like Oanda, the price on your chart might not move at all, and you can get stopped out. Or… price reaches your target, and does not close the trade. The likely culprit? Variable spreads.
Consider price is at 1.2200, you are in a sell with your stop at 1.2215. Some important HID is about to come out. Price is only moving a couple of PIPs up and down on your chart, and suddenly your trade closes. That’s because buyers with the dealing desk started
pulling their buy orders, until the buy price of available buyers hit your stop. Personally I think this is ridiculous. But the mainstream culture is so uneducated, they aren’t really noticing that much.
You’d be surprised by some of what I have seen. About 18 months ago, we were trying out a big broker (I won’t name), and after a few days, we noticed that their candles were closing 2 minutes after everyone else’s were closing. This changes the timing of trends. This changes buyer/seller resolution levels. It changes A LOT – and much more so if you are relying on any indicators (which we are not). Anyhow, I was so surprised to see this happening that I asked a friend to double check. I thought I might be imagining it. Even then, we got someone else to check, too. By the third check, we were sure it was happening and called the broker. The customer service rep had no idea what we are talking about. They put me on with a supervisor who also had no idea what we were saying. I searched the Internet and found not a single reference. Keep in mind that this is one of the five largest brokers in the US. So not one of their 13,000 clients were aware of it. Really?
My point is this: don’t assume anything. We just moved on to another broker.
Slippage
Slippage has not been a big problem for us, but it does happen. It’s the difference between the price you want and the price you get. Perhaps you thought you were gaining 14 PIPs, but when the trade closed, you only got 13. Sometimes price moves that fast. But it’s all part of the industry. If this happens a lot to you, then you need to probably change brokers. The slippage we don’t like is when price is moving fast and our stop orders cannot be filled. This tends to be more likely around events deemed likely to produce hyper volatility.
But whenever you have a question about execution or anything really about your trading platform, be sure to ask the broker to explain what happened so you can learn from the experience.
In this section, I just wanted to cover more information related to your stop loss, or the execution of your exits in general.