Stop Trading Without A Stop Loss

Hardly a week goes by that I don’t get an invitation to sit in on a webinar to learn to trade without stops. The invitation comes with warnings of the unnecessary losses traders suffer by using stops. Friends, nothing could be further from the truth. Sure, you can occasionally get picked off in a stop sweeping run by placing an inappropriate stop too close to anticipated support or resistance. However, this is much more preferable than leaving yourself vulnerable to catastrophic loss by trading without a stop.

Definition of a Stop Loss

A stop loss order is an order to buy or sell a futures or options position, or a stock, when it reaches the stated price. When that price is reached, the stop-loss order becomes a market order and the position is immediately liquidated at whatever price is available. In a fast market the exercised price may be far from your stop price; c’est la vie. The stop loss is designed to limit your loss on a position.

Futures trading is a high risk endeavor, and only a few who make a living doing it actually succeed. To succeed, the highest priority must be assigned to capital preservation and risk management. You should not be prepared to lose more than 1% of your trading capital in any given trade. With this sort of risk management you can theoretically have 100 consecutive losing trades before blown out of the game. In reality, with that record, doomsday would come a lot sooner (believe me.)

Advantages of the Stop-Loss Order

The stop-loss order is cheap catastrophe insurance and it costs nothing to implement. Secondly, a stop loss order entered when a trade is made allows your decision making to be free from any emotional influence. The so called “mental” stop is anything but free of emotional inertia.

The Trailing Stop

A trailing stop offers a trader continuing protection to his position as it becomes increasingly profitable. By trailing the stop loss as the price moves in the favor of the trader, a substantial part of the profit is increasingly protected from sudden price reversal.

The Logistics of Stop Loss Placement

By definition, stop loss placement is all about risk management and capital preservation. So there is a lot to be said for always using a dollar amount stop regardless of the ideal chart indicated technical place.

One no-brainer you need to observe; do not use a stop equal to or smaller than the average bar range of the time frame you are trading. For example, if you are trading using the 1 minute chart of the E mini S&P and the average 1 minute bar range is 1.00 point, don’t use a stop of 1.00 or less and not expect to be taken out by the “noise” of the market.

Whatever you decide, you should always calculate your risk to reward ratio. Do not risk 1 point for anything less than 3.00 points of expected gain, i.e. a risk:reward ratio of 1:3 or better. A R:R of 1:2 or 1:1 is a sure way to the poor house. Off floor scalpers are doomed to extinction for with each trade they risk a great deal for little gain. This, plus the bid:ask slippage with every trade as well as commission costs makes it impossible to come out ahead over time.

If you want to avoid the frustration of having your stop being picked off by stop sweeping, common sense when placing your stop. Placing a stop one or two ticks beyond a recent high or low, when attempting to fade those areas, is asking to be taken out. A full point beyond those obvious price levels is far less likely to be caught up in a stop sweeping run.

I know some traders who place their stop loss order first, and then place their order. Some might think this to be obsessive behavior, anal even, but believe me these OCD traders were not blown out of the game with a margin call on May 6 by someone’s fat finger.

P.S. When you take your trade off, don’t forget to cancel your stop loss order.

Trade well and follow the trend, not the so-called “experts.”

In an effort to comply with all applicable rules and regulations please be so kind and read the disclaimer below:

Risk Disclosure Statement - Past performance is not necessarily indicative of future results. The risk of loss in trading commodity futures contracts can be substantial. You should, therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should be aware of the following points:

(1) You may sustain a total loss of the funds that you deposit with your broker to establish or maintain a position in the commodity futures market, and you may incur losses beyond these amounts. If the market moves against your position, you may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position. If you do not provide the required funds within the time required by your broker, your position may be liquidated at a loss, and you will be liable for any resulting deficit in your account.

(2) Under certain market conditions, you may find it difficult or impossible to liquidate a position. This can occur, for example, when the market reaches a daily price fluctuation limit (”limit move”).

(3) Placing contingent orders, such as “stop-loss” or “stop-limit” orders, will not necessarily limit your losses to the intended amounts, since market conditions on the exchange where the order is placed may make it impossible to execute such orders.

(4) All futures positions involve risk, and a “spread” position may not be less risky than an outright “long” or “short” position.

(5) The high degree of leverage (gearing) that is often obtainable in futures trading because of the small margin requirements can work against you as well as for you. Leverage (gearing) can lead to large losses as well as gains.

(6) You should consult your broker concerning the nature of the protections available to safeguard funds or property deposited for your account. ALL OF THE POINTS NOTED ABOVE APPLY TO ALL FUTURES TRADING WHETHER FOREIGN OR DOMESTIC. IN ADDITION, IF YOU ARE CONTEMPLATING TRADING FOREIGN FUTURES OR OPTIONS CONTRACTS, YOU SHOULD BE AWARE OF THE FOLLOWING ADDITIONAL RISKS:

(7) Foreign futures transactions involve executing and clearing trades on a foreign exchange. This is the case even if the foreign exchange is formally “linked” to a domestic exchange, whereby a trade executed on one exchange liquidates or establishes a position on the other exchange. No domestic organization regulates the activities of a foreign exchange, including the execution, delivery, and clearing of transactions on such an exchange, and no domestic regulator has the power to compel enforcement of the rules of the foreign exchange or the laws of the foreign country. Moreover, such laws or regulations will vary depending on the foreign country in which the transaction occurs. For these reasons, customers who trade on foreign exchanges may not be afforded certain of the protections which apply to domestic transactions, including the right to use domestic alternative dispute resolution procedures. In particular, funds received from customers to margin foreign futures transactions may not be provided the same protections as funds received to margin futures transactions on domestic exchanges. Before you trade, you should familiarize yourself with the foreign rules which will apply to your particular transaction.

(8) Finally, you should be aware that the price of any foreign futures or option contract and, therefore, the potential profit and loss resulting there from, may be affected by any fluctuation in the foreign exchange rate between the time the order is placed and the foreign futures contract is liquidated or the foreign option contract is liquidated or exercised. THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND OTHER ASPECTS OF THE COMMODITY MARKETS