Stoploss

[danatkdan]

Hi Everyone,

I'm new to trading and T2W and have spent the last month reading, testing software and trying to climb the learning curve.

I have a question about stops that I just can't seem to answer through my own research, so here goes.

If I were to place a direct access trade for a security with a stop in place, is that stop guaranteed? e.g. I could buy 1000 shares of some company on a swing trade with a stop loss 10 points below my trade price - two days into the trade the CEO and founder of the company keels over dead at a dinner dance. Next morning the stock opens 20 points down, well below my stop loss.

What happened to my trade in this scenario?

How about a day trade - I have 2000 shares in an open day trade when there is a huge earthquake in the city. Trading is suspended and when it restarts my stock is down many points below my stop. What happened to my order? Did I lose a lot more money than my stop?

Finally, what about spread bets? How would similar situations affect a stop on a spread bet?

thanks in advance for any help!

dan.

 

[trendie]

Hi danatkdan,

I can answer your question in the context of Spreadbets only.
On a spreadbet, if the market goes heavily against you, you could be liable to losses exceeding your stoploss.

However, some companies offer Guaranteed StopLosses.
These are stoplosses which are honoured at your definfed stoploss, no matter what happens to the market.
Deal4Free ( D4F ) call them Controlled-Risk-Bets.
Finspreads, and others, call them Guaranteed StopLoss.

You have to pay a wider spread for this extra insurance.
You may also have to place your guaranteed stoploss a little further out ( minimum distance ).

Hope this helps.

 

[danatkdan]

thanks trendie

i had a feeling that would be the case for spreads because these are just bets after all and not real purchases of securities etc.

for real trades i would imagine that you could get into trouble even with a stop in place. That being the case i'm not sure how one would go about devising a water-tight money management strategy. e.g. if i risk 2% of my capital on every trade, then with a guaranteed stop my stop would be set at a point that equals that risk. If it's possible to breach the stop then my risk is higher than 2% and I'm breaking my MM rules.

So then I'm thinking that the only way to not break my MM rules in real trades is to only buy shares to the value of 2% of my capital. That means I need a huge account to buy enough shares to make a reasonable profit.

all very interesting!

dan.

 

[sharriss]

You might get some info from this post...

http://www.trade2win.com/boards/showthread.php?t=11165

 

[rich64]

Dan,

A couple of thoughts;

Remember that depending what/who you are trading with, you should be able to place multiple stops using If Done/OCO orders etc. You can then set up your trades to include your desired % max loss and also have a guaranteed "disaster" stop in place..the chances of this being hit needs to be considered in realistic terms.
I trade intraday as I consider it safer and frankly for me, far more profitable and I can sleep at night with no open positions. If you are position trading (especially on margin) then a secure disaster stop is no doubt sensible.

I would also be wary of having any open positions in certain stocks and indicies around US Payroll and other figures, it's well worth spending time watching the markets and your chosen instruments to see what they do in different conditions before (and indeed on an ongoing basis) trading with your hard earned money!

Good luck.

Rich'

 

[danatkdan]

Hi Rich,

Thanks for your advice. I'm really only just starting out on my trading adventure and plan to spend the next year or two accumulating as much knowledge as possible whilst saving some trading capital and developing a proper business plan. I certainly don't plan to risk any money in the markets any time soon.

The reason I'm asking about stops related to position trades is that most of the literature I've read so far advises not to day-trade if you are new to trading, but rather learn the markets from position trading and step up to day trading when you have a good understading. I have to say that day-trading appeals to me more and seems safer because as you say, there are no positions held overnight.

Did you go straight into day trading?

thanks
dan.

 

[danatkdan]

You might get some info from this post...

http://www.trade2win.com/boards/showthread.php?t=11165

thanks sharris...

 

[rich64]

Hi Dan,

I did pretty much what you're proposing, ie; studied for 1-2 years and then took the plunge a few months ago into full time day trading. I had previously bought and sold stocks on a position trading basis but I realise now that the skills required (emotional more than technical) are very different.

I lost money at first, mostly through making every classic mistake in the book (by the time you take your first serious day trade, you'll have read a thousand times to cut your losses short but try doing it when the trade is running against you fast and a little voice is telling you that it will change direction any moment!)

The main thing is knowing that you have learnt from these mistakes and to keep on studying and trying until you find what works for you. I am now up most days and there is light at the end of the tunnel (with a bit of luck it's not a train coming the other way!)

From a personal perspective, I simply didn't want to get to a point in my life where I regretted not trying. I won't consider myself a successfull trader until i've made good money for at least a year or two on a consistent basis but I do already consider this whole project has been a success because I'm having a go when most people don't!

Rich'

 

[danatkdan]

thanks Rich that's great; your story is the kind of inspiration i need at the moment. I'm not short of enthusiasm but the amount of information to digest at this stage is enormous!

Because I'm only learning and want to minimise expenses I'm thinking that I'll begin by studying EOD data and practice technical analysis on weekly and daily charts. D'you think this is a good approach, even if I might want to end up day-trading?

dan.

 

[rich64]

Dan,

That sounds reasonable. I don't claim to be an expert in any shape or form, far from it in fact so I'm a little sheepish about being too specific! I would suggest spending lots of time (if you can!) simply watching price action at different times of day; eg; on the open, lunchtime, following news events, up/downgrades and towards the close to get a feel for what actually happens.

I am trading with less indicators than I expected to and have had most success just using basic candlesticks and following price action, support/resistance levels and volumes. It is such a personal thing.

I've read others who suggest starting to trade early on in the process but with very small positions so there is no serious financial impact. Positive is that you are trading for real whereas paper trading can never be the same. Against this however the emotional impact of trading with larger postions can not be appreciated until you actually go for it!

Rich'