Today we’re going to discuss the use of stop-losses.
As much as most traders dislike placing stops, they’re part of the building blocks of a successful trading plan, and it does get one used to the fact that there will be situations where you are right in terms of direction yet nevertheless, you can get stopped out in the short term because of high market volatility.
That brings me to the second point. Many traders place stop-losses based on affordability instead of market volatility on the contract.
For example, take the 100oz gold futures contract. From the all time highs, we’ve had corrections of more than $100 ($10,000). So placing stops like $10 (1,000) is not exactly in your best interest. Even if you are a highly capitalized trader, it would be a bit hard to trade ranges like that. What to do?
1) Don’t trade it. If you can’t afford certain market volatility and daily trading ranges, seek those markets where volatility is lower and within your risk tolerance.
2) If you are keen on trading a certain market, you can wait until the volatility has dropped, namely the daily and weekly trading ranges are smaller.
Lastly, I have a certain market belief which is a bit biased, but this is something that I truly believe in. If after placing a trade, the market becomes favorable quickly, you should adjust the stops losses closer to the current price.
If the market’s moving slowly, the stop loss should be kept further away from the current price.
Slower moving markets could signal a fundamental change as opposed to fast moving markets that just signal a highly speculative activity.
I hope this will help you in your trading.
STOP LOSS ORDERS MAY NOT LIMIT YOUR LOSSES TO THE AMOUNT INTENDED. CERTAIN MARKET CONDITIONS MAY GET DIFFICULT OR IMPOSSIBLE TO EXECUTE SUCH ORDERS. YOU SHOULD BE AWARE THAT THERE IS A RISK OF LOSS IN FUTURES TRADING. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.