Professional Traders Always Use A Hard Stop
April 24, 2013 at 4:11 PM (QQQ)(DIA)(SPY)(GLD)(FB)
Professional Trader Or Professional Gambler?
The answer to the question, lies in the STOP! On December 20th 2012, the unthinkable happened.. the S&P 500 Emini Futures dropped 45 points in a matter of minutes prompting me to pen a cautionary tale turned prime directive -
Stop Loss - Primary Tool For Successful Trading
That was then -
S&P 500 Mini Flash Crash 12/20/12
This is now -
S&P 500 Mini Flash Crash 04/23/12
Slightly less severe in its bone jarring intensity, but still enough to not only shake you out of your position, but possibly even your account. The real reason most traders are reluctant to use a stop is the one mentioned in the previous article. Nobody wants to be wrong, and as long as you're still in the trade, no matter how much it has gone against you, there's always the chance that you really were right, that it will come back and that feels so much better.
Feeling right is almost as dangerous as feeling wrong. Feelings have no place in the world of trading. It's never about being right or wrong. It's about using a high probability setup without emotion. No matter how smooth you are, even if you're the most interesting man in the world, the market is going to disagree with your opinion 30-40% of the time. The sooner you accept that, the sooner you'll build a successful Emini Trading Business.
The cheapest business insurance you will every buy is a hard stop, server side. Some day's the premium may pinch a bit, but the good news is, you'll still be in business tomorrow. Whether you choose to use a fixed number, market structure, dollar amount, or volatility ratio to determine your actual Stop, it must be more than just an idea. It must be a physical order, live on the server side of the broker you trade with.
Remember, a Professional Trader is not defined by how many contracts he trades, but by how he behaves in the market. Even when no one is looking...
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Reader Comments (2)
Stops are important. But during flash crashes like these, stops are skipped and probably executed at the low.
The only way you would get shaken out and lose $22K on this is if you had a stop in place, or else got margin called if you were foolish enough to trade 10 contracts with less than $22K available margin. (Should not be trading 10 contracts with less than $100K to begin with). Having a "catastrophic stop" about 30 handles below market would have certainly lost you a lot of money, but not having one would have cost you nothing except a little anxiety.