Stop Losses

16 Jan, 4.00 gmt

OK, finally I feel like we are in ‘normal’ markets and I am ‘in sync’ with the market. Feels like I’ve got my mojo back, even better than late last week. A small mistake earlier in the week when I went long the Yen pairs and did not close the longs when I got the signal, expecting it to be a shallow dip. Luckily I entered shorts at the same time as the signal, which are now a total of 400+ pips into the money at pretty high leverage. So the account will look healthy when these trades are closed.

I’ve now placed hard stops in both pairs at my BE+5, which is about 100 pips above the market now.

I don’t blog about my stops much, but in this kind of trade I have not much else to do so I can write about my stop management.

Firstly, I rarely set ‘hard’ stops. The levels I post are ‘mental’ stops, but I would not recommend this to others. Occasionally when the situation warrants, I set hard stops to save me from catastrophe. Example would be if I am going to be unable to get to a computer for a while, I set the stop far enough from the market to have no chance of getting hit unless there was an earthquake, tsunami, a war or assassination somewhere in the world. 🙂

I also don’t set trailing stops since my system exit signal always provides a good enough level to take profits without having to continuously monitor the trailing stops.

We as traders have to live with constant stop-hunts by fx dealers. It used to make me angry to see very blatant stop hunts, especially when I was the victim. The price would spike up or down just enough to take out my stop and then it reverses back in seconds! Most of us will blame the platform provider / broker, and in some cases the brokers do manipulate their data-feed to harvest an especially rich zone of stops loss orders. More often, it is bank dealers who go for the stops. Dealers get commission on each client order they execute. So they have every incentive to move the market to the level where they have large orders on their books. In the absence of market-moving data/news or some big Central Bank / Fund activity in the market, such ‘manipulation’ by fx dealers is what moves the market.

Some years ago I realised that this is part of the environment we traders have to work in, we have to live with this. Getting angry doesn’t help. So I gave it some thought and the obvious answer is to place the stops so far away that my trade is definitely wrong way before the market gets there. More likely I would have closed the order manually before the stop is hit.

Another method, which I use, is to set platform alerts at the mental stops that my trade requires. When the alert triggers, I observe the market activity and evaluate if it looks like a routine stop hunt or the move is the result of some sentiment-changing event like a data release, some politician’s statement. If it looks like a stop hunt (eg Monday morning Asian sessions, late afternoon NY sessions, or when the market is in a tight range waiting for some event) I don’t close my trade. This way I avoid getting hit by most stop hunts, and can focus on the bigger picture of the trade.



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