Protective Stops: Adjusting Your Stop

by Charles Holt, CTA

After you have entered a trade and entered a stop loss order, your stop needs to be adjusted to lessen the amount of money you have at risk and to protect larger amounts of profit. It is mandatory that you move your stop only in the direction of the trade. To do otherwise is indulging in fantasy and false hope.

Shortly after you enter a trade, you should quickly enter a stop loss. When entering a long trade your stop-loss order should be placed below the most recent support level. When entering a short trade, your stop- loss order should be placed above the most recent resistance level. The Bulletin Signals issue Management stop-loss information on every Entry Bulletin.

As the trade progresses, Management Bulletins issue advice on where and when to place your break-even and protect-profit orders. Generally we issue a break-even stop-loss when a retracement occurs below our entry and then reverses. After the next retracement occurs and reverses, we then move our protect-profit order to protect at least half of our open profits.

These are general guidelines. If the market is experiencing large percentage retracements but continues trending in our direction, we will wait longer before entering a break-even or protect profit order.

Using Mental Stops

Many traders prefer mental stops for protection. Some traders feel that by having a stop order resting on the floor, they are vulnerable to a run on their stop, and in many cases, they are correct. If you want to use mental stops, you need to be aware of the amount of slippage that occurs from the time you decide to place an order until you receive your flash fill.

Check the time it takes to place a market order on a number of occasions and average the number. If it takes one minute to get your fill, then see what dollar range the current 1-minute bars are on your chart.

This dollar value will be your probable slippage. I say probable because in some market conditions, price can move very rapidly against your position and with no stop in the market, your trading account could suffer accordingly.

In any event, if the amount of slippage that occurs between the time you decide to make a trade, and the receipt of your flash fill is comfortable for you, then by all means use mental stops. However, if you are subject to interruptions during your trading, or if you are easily distracted, I advise against your using mental stops.

About the Author:

Charles Holt
Daytrader's Bulletin
http://www.daytradersbulletin.com
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