T2W Trading Community

Q - I'm thinking about using time-based stops instead of price-based stops. Do they work?

A - Time-based stops may work, but time cycles are 10 times harder to manage properly than price. So your chances of being wrong with time stops are about 10 times as great. You'll also experience major drawdowns while you wait for your time to get hit.

Q - How can I protect my positions from gaps and sudden price moves? Sometimes they happen before I have a chance to set my stop losses.

A - Plan a fire drill and practice it in your head at all times. The fire drill is a consideration for the worst-case scenario. Of course, we protect positions with stops whenever we can. But things such as gaps and world events can carry positions through them, and we need to know exactly what to do when the market spikes. The only way to accomplish this is to visualize it happening and to see how you really want to address it. Then you'll act spontaneously when the time comes.

If a stock is set to gap through your stop loss when it opens, do you sell it immediately or wait for a bounce? There's really no right answer. I usually pull my stop and watch the first few minutes of trading. If the market reverses, I try to close out on the bounce to a common retracement level.

Some midday panic situations are global, while others are sudden. Most times, my preferred fire drill is to exit first and ask questions later. Sometimes I'll see the futures go crazy and not know why. They may not affect my individual positions at the time, but I'll often exit everything until I can find out what happened. I still remember the futures going crazy on Sept. 11, 2001. There was only a few minutes to jump ship before the market was shut down for days.

Q - I'm placing very tight stops on every trade, but they keep getting hit. What am I doing wrong?

A - Base your stops on the risk profile of the stock you're trading. You can't trade a volatile biotech stock and expect to get away with a 15-cent stop loss. But you might be able to do it with a slow moving REIT or paper company. Look at total dollar exposure and the stock's volatility. Be focused on exiting when you're wrong, wherever that is on the price chart. The only way that makes sense with your stop loss is if your entry was appropriate to the trade setup. You can also take another shot at a stock if your stop loss gets hit or the stock recovers. These new positions should move in your favor immediately, or you should jump ship again because you were already wrong once.

Q - I want to hold on to a trade as long as the pattern stays intact. So I place my stop loss just outside the edge of the pattern. But what do I do when price breaks out in my favor for a bar or two and then falls back into the pattern?

A - You need to exit right away after a false breakout or breakdown, regardless of where you've placed your stop loss. The false move creates overhead supply (or underlying demand in a short sale) and raises the odds the pattern will break the other way. This is classic pattern-failure dynamics.

Rigid stop-loss placement with global rules undermines good trade management. Management is more important than knowledge and all the technical analysis in the world. You have to be a manager of your trades and your trading style. That gives you the courage to re-enter good positions when you get blown out of them, if and when conditions change.