Stock Trading Experts: Using Sane Stop Loss Placement

I’ll never forget the day I nearly cleaned up in the futures market. I’d been trading for about 3 months, and had been making small profits and losses.

Nothing to get really excited about.

But after spending a lot of time doing my analysis, I was pretty confident we’d seen a major low in the market, and the trend was changing to up.

As WD Gann said, the safest place to buy is the first higher low once the new uptrend has begun. I watched the market make a higher swing high after a panic selloff, and waited for the retracement to a higher low. Since a market will often react around 50% of an advance, I had a price target that if hit, I was ready to buy.

The market hit my price target at around 2.30 pm that day, and started to rally. Problem was, I started to second guess my forecast, and hesitated for about 30 minutes, and all the time, the market was going up.

By the time I pulled the trigger, the Share Price Index Futures contract had rallied 25 points. No big deal, but I could have gotten in a lot better if I had taken action earlier. OK, so I’m in the market, now to place a stop loss order in case I was wrong.

Back in those days, I had this stupid arbitrary stop loss point of $500. I couldn’t see myself losing more than that on any one trade, so that was usually where my stop loss would go – $500 away from my point of entry. To be proven wrong by the market, I needed a stop of 30 points ($750). But because of my arbitrary stop loss rule, I put my stop 20 points away, and hoped for the best.

As soon as I had confirmation that my order had been filled, the market started to fall away.

I watched in disbelief as my stop loss point loomed, and as so often happened to me in those early days, I was stopped out for a loss of $500 plus commission.

The market fell another 3 points (it NEVER reached the point where my stop loss SHOULD have been – ever) and started to rally. The SPI closed strongly on the day, and overnight, the US announced they were dropping interest rates, and the DOW was up 360 points (which was a huge move in those days).

Our market opened over 80 points higher that day, and ironically over the next 3 months rallied a total of exactly 360 points as well.

Stupid stop loss placement that day cost me a potential profit of $9000 per contract.

Not to mention the compounding opportunities I could have had as my profits grew.

So what’s the message here? Yes we need stop loss orders to protect ourselves against huge losses, but put your stops in a SANE place. The best place to put them is where the market has to change trend to get you. If your analysis is wrong, then you want to be out of there. But if you are correct, you want to be able to hang in there for the long haul and grab your profits.

If you can’t put your stops in the right place because of your capital rules, lower your position size so you are back in balance.

Making a smaller profit, but being on board for the ride is much better than overtrading and getting knocked out of the game before it even begins.

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