Wednesday 10 October 2018

The Free Trade - The Utility and Limitations of Stop Orders

When I enter into a trade, once the order is filled, I immediately enter my stop loss order into my trading platform.

Yes, its mechanical and not a mental stop; I don't trust myself. 

Then I can go walk here, walk there!

Hello, the currency market is near 24 hours. How to stare at the screen all the time? I need my beauty sleep OK?

What happens next is either I'll be stopped-out at a pre-determined $ amount I can afford to lose, or this trade has become "in the money".

If its the latter, nothing is more satisfying than moving my stop to my entry price plus 2 pips/ticks to cover my transaction costs.

Now I have a "free" trading position!

That's the best risk/reward or what?

If market continues to move in my favour, I'll make more.

If market suddenly turns against me, I can get out without a scratch!

The only way for me to lose money is when the market has a big gap move. It can and has happened.  Mercifully, I wasn't in that EUR/CHF massacre some time back.

That's when many discovered stop orders can't protect us on big gap days :(

When enough clients go bankrupt, brokers went bankrupt too.


  1. Hi Jared,

    The risk of big gap moves bypassing the stops is much lower in forex than in stocks. It is not uncommon for stocks to gap down >10% or even >20% at the opening. I have been personally injured by this kind of gap-down moves in stocks in the past after a poorer-than-expected earnings was announced. Hence, the importance of diversification in stocks. For forex, 1% is a huge move. Gaps in forex rarely occur and even when they occur, the gaps are much smaller than the gaps in stocks. Look at the price chart of a typical major forex pair. Most of the bars overlap each other. So, it is safer for a trader to place larger positions with more concentration in forex than in stocks as long as he is mindful of the leverage. I'm confident you can stay as a Man of Leisure forever trading forex :)

    1. hyom hyom,

      Well, everyone was thinking like you...

      How would you like to be caught by a 20-standard deviation move? You're an engineer; you know the significance!

      Or put it in plain engiish, to experience a -30% intraday move for a highly liquid EUR/CHF pair?

      Its not an emerging country banana republic currency pair!

      That's why I avoid making trite remarks like if this company fails, Singapore will fail too. As if saying so will make the risk go away...

      Something to instill the fear of black swan events into your soul:

      A year after Swiss franc debacle

      That's why quite a few forex brokers and some hedge funds went broke :(

      In trading, "I'm confident" is very dangerous...

  2. OK, my bad!

    I've jinxed the markets by talking about gap moves :(

    This morning, the Simsci gapped down 8.75 points (or 2.5%) during the pre-market opening.

    Those on the "right" side of the trade are happy; those on the "wrong" side not so happy.

  3. US stock market has much worse gap downs yesterday.
    Hope you are on the right side of the trade!

    1. An example of a recent "free trade":

      Short the Simsci on Monday 08 Oct at 363.

      Today 12 Oct, I got profit stopped at 348.4 by the reversal today (covered my short).

      Made money but not exactly happy. I would have preferred to hold the position longer...

      But what to do?

      Rules are rules.

      If tonight S&P closed up, I'll give myself a pat.

      If S&P closed down again, well, next week is another trading week :)

    2. Hi SMOL,

      I'm staying up a bit later tonight. Cutlery out already. Hope I can get my fill soon.

    3. Unintelligent Nerd,

      You buy-the-dippers you ;)

      Youths are not panda Singapore stocks only!

      Very different from old fogeys ;)

  4. Hi SMOL,

    Good move to short simsci on Monday. If you short too late then today will get whipped out.
    All my US long suffered, and barely recouped some losses through shorting QQQ.

    1. Because the longs got stopped out. Scary gap ups and gap downs...
      Those who continued to short yesterday would suffer from the gap ups today.

    2. Rainbow girl,

      I got lucky.

      Tonight all the 3 US indices are in the green. Let's see whether it will stay that way till the closing ;)

      Yup, if the market is too volatile, there's something to be said for intraday trading!

      Sleep better knowing money is in our pockets at the end of each trading day.

      However, the real money is made riding longer trending trades!

      Like everything else, we have to choose our own poisons :(

    3. I scared my QQQ get whipsawed out, so I put my stop a bit far away. Luckily. It climbed up and up and up then after I log in again now to see, it tumbled back down. You are right, there's too much volatility and unpredictability in intra-day trading.

      "However, the real money is made riding longer trending trades!" -words of wisdom.

    4. Rainbow girl,

      Before going to sleep, I saw the Dow in the red and the other two giving up most of their morning gains... (Unintelligent Nerd got his order filled?)

      Idiot! I got shaken out of my position :(

      This morning, all US indices back in the green. Nasdaq power! with 2.29% gain!

      I can't predict what the markets will do.

      I can only focus on what I can control - my entries and exits.


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