This gut-wrenching market volatility certainly brings one's stop loss policy into sharp focus. For short-term trading systems, we use tight stops, but for our longer-term trend trades, we prefer to give them room to breathe. However, if we give them too much room, we can see our hard-won profits disappearing in one ugly week. Our compromise is to tighten our stops as the amount of profit at risk increases. So, for trades below 40% profit, we have no stops at all, just an exit on the moving average crossover. Above 40%, we start to tighten - so up to 50% profit we have a 15% trailing stop, up to 60% profit a 10% stop, and so on.
You have set your stops, and placed them as live sell stop-loss orders in the market. You assume that everything is under control - and then Wham! - the market opens down nearly 4%. The price gaps down, and your stop is not activated because the price never touched your trigger price. What do you do? Well, you don't sit there frozen with fear, like a rabbit in the headlights - this is when you need a plan, one that you have worked out in advance for just such an occurence. You may decide on a different course of action, but here is one plan to get you thinking:
- Compare the price 5 minutes after the Open with the Open price - if it is lower, sell half your holding.
- Compare the price 30 minutes after the Open with the Open-plus-5-minute price - if it is lower, sell the balance. If not, hold on, with the Open-plus-5-minute price as your new stop-loss.
Adjust this plan, depending on whether you can tolerate more or less risk.
Copyright © 2011 Mick Brooks
Copyright © 2018 Mick Brooks