Stop-Loss orders can make you money and save you from yourself
Saturday, July 21, 2018
The best traders know every function of their software and every missing function of the software intimately. Why? Because they are always in charge and are always trying to push the boundaries of functionality up against the limits of their tools. This educational endeavour requires exploration in a safe, simulated environment but realistic environment.
Beginner traders (those trading for less than 12 months) are not the best traders. They may be the traders with incredible potential and some can consistently extract $2,000+ per week from their chosen market but they simply lack the refined skillset, the market experience, and the trading size to be considered elite. It is widely acknowledged throughout performance literature across every field of study, that at least 10,000 hours of intentional practice is required for true mastery. It could be argued that mastery in trading is even more difficult. Given that there are no weight classes or divisions of skill, the beginner trader is truly thrown into competition at the deep end, with the whales (greatest size) and the GOATs (Greatest) - the zen masters of the markets. Competing effectively and learning to do the right things very well is an extremely important early requirement. The learning curve for a new trader, especially in the first 12 months can seem unforgiving and frustratingly relentless. But for those that really want it – the associated feelings are but a side note in the journal of their journey to greatness.
It is well understood in trading courses that during a period of training or apprenticeship, it is wise for the beginner trader to execute their trade entries and trade exits manually. By manually, I mean using a market order to enter the market when intended and using a market order to exit the market when intended. This can, particularly in volatile markets lose you one or 2 ticks per trade. But the alternative is using a limit order, which can miss execution if the market happens to move faster in a given direction than expected. Know your order types…practice entry and exit in times of quiet, serene, sideways monotony and in times of gut-wrenching, heart-pumping, volatile insanity. Practicing with manual execution is an exercise not only to improve the mechanics of order entry which needs to be as proficient as a top computer gamer but just as importantly it allows you to practice the psychology of trade entry and exit. Getting in precisely when your signal appears and getting out precisely when your profit target or your stop are touched are some of the most basic, everyday experiences in trading. They are also the most difficult because they come packaged with hope, desperation, despair, excitement, disappointment and every other emotion on the spectrum and identifying, unpacking and dealing effectively with each of these emotions separates the best from the also-rans.
For at least the first 6 months of trading, avoid stop losses altogether. Enjoy your psychological and emotional rollercoaster and fully document the process. Then go all-in on stop-loss for at least 3 months. Explore Stop-Market, Stop-Limit and Trailing Stop orders. Explore combinations of each including their use in Bracket orders. Know every method for setup of the orders, entry of the orders and deletions of these orders like you know the alphabet. Record your results from their usage and record the feeling that you have when you see them execute exactly where you placed them in the markets. Record when you decide to move them in the market from their original placement and always, always ask the question: Why did I do that? Remember, if you don’t know your why, you are worshiping the Gods of Hope, Entitlement and Randomness, which will guarantee failure.
5 Sample Exercises – Do not practice in live markets!
- Use a Stop Limit to exit a trade in a quiet market
- Use a Stop Limit to exit a trade in a volatile market such as market open, market close or an economic figure.
- Use a Trailing Stop-Limit order to exit a trade that follows the market price by 6 ticks.
- Now use a Stop Market to enter a trade. The scenario here is, “I want to catch a breakout in a particular direction. If the market trades here, I’ll buy with the view to running the trade for 10 ticks. I’ll exit the trade manually if the trade goes 4 ticks offside.”
- Try a bracket order on the back of trade entry with a Stop Market. The scenario here is, “I want to catch a market breakout in a particular direction. Once the trade is on, I want to use a market order to exit the trade at a profit target of 10 ticks and I want to use a trailing stop market order to exit the trade, 5 ticks off market price.
“When I became a winner, I said, ‘I figured it out, but if I’m wrong, I’m getting the hell out, because I want to save my money and go on to the next trade.’” – Marty Schwartz
Enjoy! Happy Trading.
The TraderDock Team