Your primary job as a currency trader is to protect your capital first and make a profit second. Making a trade that results in a loss is fact of life for traders but what you do when things go bad can make a big impact to your profitability. If you followed my USD/JPY short from last week by now you know it didn’t work out. I was stopped out but how I managed my stop is the subject of today’s post.
Managing stops usually fall into two schools of thought. Traders either attempt to trail the market by moving their stop or they leave their stop where it sits until they either take profit or are well in the money. I fall into the second group of traders.
Many traders live and die by the adage “never let a winner turn into a looser” but this kind of zero tolerance thinking can hurt long term traders because the market needs room to breathe.
Stops are there to predetermine the risk your willing to accept on a trade, not limit your profit. If you trail too closely you may be taken out moments before the trade runs in your favor.
Some people probably think I’m crazy to not protect a trade that was 50 points in the money but if I had a pip for every trailing stop order “ticked” out just before the market moved in my favor, I’d be a NetJets customer by now.
When things go horribly wrong however there is no reason to stand there and wait for the train to run you over. This morning U.S. Treasury Secretary Henry Paulson and Philadelphia Fed President Charles Plosser dropped two comments that tanked my short position. Paulson said the U.S. Government supports a strong USD and Plosser said the FOMC should raise interest rates “sooner rather than later”.
This is a perfect example of market sentiment changing on a dime. The Dollar rallied smartly and it was clear my short was going to lose its shorts. I bailed on the trade early with only a 20.5 point loss rather than a 60 point loss had I stuck with my stop.
The point is managing your stops is a personal preference. I like to leave them where they sit until I’m well in the money because long term trades need room to grow but when things go horribly wrong fast don’t be afraid to dump the trade early.
What are your thoughts on stops? Share them by clicking here.
Best of luck,
Ryan
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It seems like every time I am in a trade and even though market sentiment has changed I still don’t get out. I would almost always be better off exiting my position and taking the current loss instead of just letting it hit my stop loss. Protecting capital first is def. something I need to remember.
Agreed! Often I have watched the candles gather speed and momentum towards my stop and felt like a rabbit in the headlights! The psycology was that it was somehow against the plan and I struggled with that.
However, if that situation occurs now and it’s very apparent that price and stop will be eloping, I don’t have a problem with closing out. The benefit is that I get some small psycological lift for defending the account and making the best of the situation.
Alex
I agree with Ryan about how to use stops. I set a stop and then we only move it once I’m deep in the money. When that happens I move the stop to just below the nearest major support/resistance. I agree with you about giving trades room to breathe especially on longer term charts. I trade weekly and daily charts mostly. I also agree about bailing early if you know the situation has drastically changed! Happy trading!
Hi Ryan,
I like your approach that a currency trader’s primary job is to protect the capital first and make a profit second. I agree with you.
I followed your USD/JPY short from last week but my 60 stop loss was reached. I understand the point you mention that when things go horribly wrong there is no reason to stand there. My question is when a trader follows only technical like me how to know when is time to get out before being stopped out?
I appreciate your comments.
Thank You
Carlos
Hi Carlos,
I firmly believe it is crucial to keep focused on the fundamental events that may affect your technical trade.
Paulson and Plosser could easily have said “we like dollar where it is” we would have made a ga-zillion pips on this trade.
The key point is to remember that anything can and does happen during the trading week so pay attention to the fundamental calendar and know when events are going to occur that might blow your trade out of the water. Speeches by members of the FOMC certainly qualify as important events because their words can turn market sentiment on a dime as we saw yesterday.
I use the calendar at ForexFactory.com for economic events but for speeches you really just need to pay attention to the cable or internet news feeds or better yet be watching the market for extreme reactions.
I guess my main point is you can’t pay attention to just techincals or just fundamentals, it’s the whole package that affects your position.
Hope that helps,
Ryan