Monday, December 07, 2015

A frustrating week - and a look at stops

Last week was a frustrating week. At one point I had three positions open but by the end of the week I was back to being 100% in cash. Lets look at what happened:

Trade 1 - price fell on a UK stock I'd been holding for a while after paying a dividend. It is quite rare for me to hold such a stock, and that price adjustment, combined with the volatility that hit the market on Thursday, helped trigger my stop early on Friday. As it happened, most of my loss was covered by the dividend.

Trade 2 - On Tuesday, I managed to get into a forex trade which was starting to move up. Then on Friday it spiked down in the immediate aftermath of the Non-Farm Payrolls announcement, just touching my stop before then rallying to new highs. Frustrating yes, but having seen how some forex pairs moved the previous day following the ECB interest rate decision, it is a (very) small loss I was happy to take. 

Trade 3 - A US stock hit my breakout entry level on Thursday, before the general market started to drop quite sharply over the remainder of the day. My stop was hit on Friday.

So yes, three trades which quickly failed. If a trade isn't performing as intended, then I get the hell out, and I move on.

I had a discussion about the forex trade with some of the guys in our group, and again this situation brought up the debate about the merits of intra-day stops versus end of day stops. 

My belief has always been that, if my stop level is hit, whether its in the first minute of the trading day or the last, I get out and ask questions later. I never want to give a trade the opportunity to go from a small loss to a much bigger one. Sure, if I was using an end of day stop, then I would have been kept in the position, and which would have been showing a profit at the end of the week. 

But, what if you had been in one of those Euro-based pairs that moved 300-400 pips on Thursday, and you were waiting (hoping?) for price to move back in the direction you were trading, so that your end of day stop wasn't triggered? 

As an example, here is the chart of the EUR/USD which had been in a downtrend for a while. As we can see, the exit level was breached on Thursday and price went a further 300 pips higher before dropping back a bit from the high of the day! Using an end of day stop would have wiped out a chunk of the profits you had patiently accumulated over the preceding weeks.

To be fair, I could also easily show you plenty of charts too where an end of day stop would have worked in your favour.

I know I couldn't cope with seeing something move that much against me, generating that much slippage or erosion of open profits. I'd much rather run the risk of being occasionally whipsawed around through price noise - but that's just me. You may well take the opposite point of view. Neither is wrong.

These type of questions about how you construct your own rules, only you can answer. You pays your money, you takes your choice.

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