Saturday, May 31, 2014

The taking of stops - intra-day or end of day?

There is always a debate going on regarding whether you should take stops and exit trades on an intra-day move, or do you wait to see if price moves back in your favour before the end of the day.

This is somewhat similar to the argument about whether you should wait for an end of day close above a certain price level before initiating a position, or do you take it on an intra-day price move.

As a comparison, below are two infamous historic trading events, which caused price shocks - one of which you would have benefited by using intra-day stops, the other using end of day stops.

The 1987 stock market crash
If you were holding long positions on Monday October 19, 1987, would you have waited for an end of day close before exiting, or would you have just got the hell out? Remember the Dow fell over 22% that day, and now there are market circuit breakers in place. Those with intra-day hard stops in the market would have been taken out (possibly with a chunk of slippage). Those who held on to the end of the day would have seen those losses probably getting bigger.

The flash crash of 06 May 2010
If you had hard stops in place when the Dow decided to fall 1,000 points in a matter of minutes, before making in all back, chances are you would have been stopped out on some or all of your oppositions. Had you been using end of day stops, on the other hand, there is a strong possibility you would not have been stopped out of your trades.

Each trader should work out for themselves which approach to use, and be consistent with it. Neither approach is wrong.

For what its worth, my own approach is to have hard stops placed at all times, so if they get hit on an intra-day movement I am taken out of the trade. While I accept I may be stopped out on an intra-day spike or noise, I know that I have kept my losses as small as possible, and prevented them from getting any larger. 

If you use end of day stops, maybe you should consider some overall 'uncle point' which will lead to an automatic liquidation of all positions. Either way, your overall trading plan should take into account these types of extreme events, and how you would react to them.

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