using stops and spreads in direct access trading

[uptufernou]

to all those knowledgable traders please forgive me but i need an answer if possible. i have been papertrading for a good while now (didn't want to take the plunge until i had a strategy i was comfortable with) and have achieved good results ON PAPER!

the question i pose is.... if share xyz is trading at 31.5 on the ask and 31.45 on the bid,
and i buy at 31.5. i set my stop at, say 31.3 giving a potential loss of 20c
if the trade goes against me.

the trade goes against me to 31.34 before reversing and going in the direction i anticipated. because of the spread of 5c i would be stopped out by 1c.
do you add the 5c spread into your stoploss price ie20c stoploss plus 5c spread=stop now 31.25 or do you accept the spread in your calcs.

on a tight spread, 5c either way can make a difference to a successful trade or a losing trade. by the way i am talking about direct access trading the nasdaq stocks
. how do others set their stops taking into consideration the spread?
i know you can use limit orders but what do you do if not using limit orders?
any advice would be greatly appreciated.
thanks
uptufernou

 

[Trader333]

This all depends on the method you use to trigger your stop. If you are using "Last Traded Price" then you could find that you get stopped out at a much worse price depending upon what the Bid price is at the point the trade is triggered, ie if the last traded price is $31.30 but the bid is dropping fast and is now $31.20 then that is the price you will get filled at. Another possibility is that you could trigger your stop when the Bid reaches a certain price in which case you would probably get filled at the price you wanted.

Personally I only ever set mental stops and exit trades based on that.


Paul

 

[stevet]

you want to be careful getting into a trade where the spread is that wide - since the wideness of the spread is telling you that even the experts are not sure where the stock is going

and if the spread comes in to be one cent - and it goes against you - you are sitting on a 5 cent loss if it comes off the .45 and even a cent or so if it just hits the mid

and bear in mind that where your stop is set is not where you will probably get the fill - which could be multiples of cents worse

you need a real good knowledge of trading not to keep getting eaten up on intra-day stock trades - and close stops is not the way to go unless you have that knowledge and are paying real real low professional commisions

 

[uptufernou]

thanks for your comments, they are greatly appreciated. stevet you say close stops are not the way to go. if they are not the way to go, would you mind telling me what is? i am eager to learn from the likes of yourself and others but some specifics would be greatly appreciated.
thanks
uptufernou

 

[stevet]

traders tend not to use stops in the way most learners feel they should be used

better to say a trader closes an open position when factors that got the trader into the position then reverse or the trade simply is not developing fast enough, this could be with a small loss, breakeven, or small win

traders may in fact open their position at the very level that you would be placing your stop so they are opening the position at the level you are closing

but as a specific point - just be careful of a stock with a spread of 5c or more - or if the price is crossed - that is the bid greater than the ask - both these conditions mean that no one is sure which way the stock is going to go or the stock is illiquid and you really should not be trading it

 

[uptufernou]

thanks stevet and trader333 for the replies, by watching the main mm's on level 2 and where they are supporting the market, would this be a sensible strategy or am i still missing the point?

 

[stevet]

forget watching mm's and multiple levels on level 2 - it is easy to pull and add size to any price level - and if it was easy - the mm's would not keep jumping from the bid to the ask and back again - so forget about using mulitple price levels on level2 - your data supply would not be up to it and it takes a lot of experience to understand whats going on - and i mean years - just watch the spread - that is the inside of the mm's and that coupled with the price going up or down is gonna tell you all you need to at least make your trades safer

 

[dod]

Paul,

You say you only use mental stops. I think I understand why, but I wonder if you ever worry about what would happen if some emergency arose that prevented you from exiting a trade on the basis of such a stop? I don’t just mean your internet connection going down because presumably you have some back up plan for that. But what if you (heaven forbid) had a stroke, or simply fainted; or one of your kids (if you have any) fell down the stairs and was injured; or a burglar with a gun suddenly poked his head through your office door?

I wonder about these things! I’ve so far always traded (indices) by putting a conditional, hard stop in place as soon as I’m filled. I’m not sure if this can be done with Nasdaq direct access but I imagine a ‘catastrophic’ hard stop might be placed (either before, conditional on, or immediately after entry) some way away from price action that under normal circumstances would be unlikely to be hit that could then be cancelled as and when a trade was manually closed, whether using a target or a mental stop. That way, should a trader not be able to close a trade manually, and the market went badly wrong on them, they would be protected, to some degree.

Does that make sense? I know it’s an unlikely scenario; but so is a house fire, and most of us insure against that.

Nick

 

[Trader333]

Dod,

The problem with placing stop orders in the market (with IB at least) is that they get activated too late. By using mental stops and using a market order I get out quicker and with less of a loss. I will also consider deliberately routing my order in a particular way if I am concerned about market volaitility.

I suppose that I could take things to extremes (based on your analogy of a extreme possible scenarios) in which case I could place a stop order maybe 25 points away just in case one of the above scenarios happens and then just cancel it if my market order works.


Paul

 

[theknifemac]

Dod,

The problem with placing stop orders in the market (with IB at least) is that they get activated too late. By using mental stops and using a market order I get out quicker and with less of a loss. I will also consider deliberately routing my order in a particular way if I am concerned about market volaitility.

I suppose that I could take things to extremes (based on your analogy of a extreme possible scenarios) in which case I could place a stop order maybe 25 points away just in case one of the above scenarios happens and then just cancel it if my market order works.


Paul

Paul

What do you mean that the IB stops are activated too late ? How are you triggering your mental stops - I know that IB can have stops triggered by the bid/ask going through your stop or by the last trade going through it a number of times. Or is it simply that the IB stops are held on their end rather than at the Nasdaq / NYSE ?

Cheers

Stew

 

[dod]

Paul,

Thanks for the reply. Maybe I'm worrying too much. However, I remember reading in some book on trading (all I do remember from that book) the author saying he always placed hard stops because he didn't want to wake up in a hospital bed (after his surprise heart attack) with his wife leaning over him asking:

"Honey, what's a margin call?"

Nick

 

[Trader333]

Stew,

For some reason if you use IB stops of any kind you can find you are 10c past your trigger price before it activates which is just too late in my view. With market orders you get filled pretty much instantly.


Paul