“Man I am glad I got stopped out when I did…look where the market is trading now!” This is probably a true statement if the market really went in the opposite direction that you thought it would go. But what if you were a part of the market move after you were stopped out?!
Buying on support and/or selling against resistance are not new concepts. Chances are you have traded on both of these ideas. But what about the times when you were wrong? What happens to the price action after you were stopped out? Was there a trading opportunity missed?
STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
A strategy that I sometimes look to employ is to make my stop loss order a 2 lot when trading a buy support or sell resistance type strategy. Let’s think about that idea and discuss what it means.
Let’s say I want to buy a market where there is a level of support that I would like to see the market bounce off of. BUT, under this level of support there is a decent amount of possible downside price action if this support level does not hold. So, I will enter my buy order at this area of support and put my stop loss order underneath this level of support. BUT, I will make my stop order to sell a 2 lot!
(I call it the Break Flip 2 Stop Strategy. If we Break support or resistance, I Flip my position with a 2 lot Stop order)
One will exit my one long position and the 2nd will initiate a brand new position making me short a contract. I do this to participate in this possible penetration of a support level. My thought process is that if the support level does not hold and I am wrong with my initial long position, I want to be short the market moving forward. So as my initial long position gets stopped out, I would realize my losses on the first trade but I would immediately initiate a short position based on the break of the support level, thus trying to potentially take advantage of a possible move lower at that point.
Here is an example:
Let’s say the trader buys the July Kansas City Wheat contract at 740’0
The stop price would be 730’0…but you would make it a 2 lot.
Thought process: If this 730’0 level does NOT hold, you may want to initiate a short position at the exact same time looking at a market that may begin to trade lower and into the yellow shaded box.
Have a look:
The same strategy could be used when you are trying to sell resistance or selling a double top. If you are wrong and the market breaks to the upside, you would take the loss on the initial short position, but immediately put on a long position to potentially catch a move higher based on the resistance level not holding.
Here is another example:
Lets say the trader wants to sell the Canadian Dollar at 91.00
The trader puts the stop loss order at 91.60 …but makes it a 2 lot.
Thought process: If this 91.60 level does NOT hold, you may want to initiate a long position at the exact same time looking at a market that may begin to trade higher (see yellow shaded box).
Have a look:
By no means is this a fool proof option that works every time. And of course there are certain levels and/or trade ideas where this strategy may not be a good fit at all. It is merely an idea that tries to recognize when you are wrong, exiting your current futures contract and flipping your position the other way to potentially trade a market that may have a decent break-out ahead of it.
Please note: A new stop loss order will need to be entered once your reversal play has been executed. Unless of course you have the capability to place OSO (One Signals Other) contingency orders. In my opinion, a good rule of thumb for a level to consider is the entry level from the previous trade.
If you understand the strategy and are comfortable with the execution, look to add it to your arsenal of trade idea strategies.
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Risk Disclosure
STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADE PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF THE HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
STRATEGIES USING COMBINATIONS OF POSITIONS, SUCH AS SPREAD AND STRADDLE POSITIONS MAY BE AS RISKY AS TAKING A SIMPLE LONG OR SHORT POSITION.
EXAMPLES OF SEASONAL PRICE MOVES OR EXTREME MARKET CONDITIONS ARE NOT MEANT TO IMPLY THAT SUCH MOVES OR CONDITIONS ARE COMMON OCCURRENCES OR LIKELY TO OCCUR.
IT MAY NOT BE POSSIBLE TO LIMIT LOSSES TO THE EXACT LOSS LIMIT DEPENDING UPON MARKET CONDITIONS AND THE POSSIBILITY OF LIMIT MOVES.
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