Playing the game

On setting stops

At the close last night, my EUR/USD long was showing a profit of some 50 points. However, given that practically every piece of news on the dollar was negative and so any countertrend was likely to be aggressive, it was a good idea to protect my position (from the risk of future losses) with stops. The question was, just how much to risk, and where to put my stops? I looked back at the recent price behaviour and determined a level that appeared to act as a price support, and would ensure me a small profit if it was breached. So I put a stop at this level. This is what happened (see chart): Stops scenario

Drat! The desire to protect a small profit has again cost me a large profit. This has happened to me so many times it's not true. And furthermore, my stop was whiskered at 1 point above the local support price (See the chart). I can't believe how often this occurs, to me it is like I am a target for those traders who can see stop orders waiting to be hit, and I often feel like I've been cheated.

So how does a man make money? My fear of losses and my greed to keep a small profit have conspired together to make me sucker myself out of a large profit. Just like in the above case I began the trade correctly and I wanted to stay with it, but evidently I placed my stop too tight by the smallest fraction. So a stop needs to be always a little loose and incorporate a buffer around the price support level. You have to pay the insurance premium. One cannot hope to choose the right level every time. Then again, the market may come back to this level some time in the future which would be a good place to begin again...

I cannot help thinking that the same situation applies with profit taking. You set a limit, the market comes within 1 point of the limit but then reverses and hits your stops on the way back so you get nothing. Or maybe it hits the limit but storms ahead 100 more points so you get something but feel foolish about all the rest. Then again, perhaps a speculator ought to feel satisfied that the market has hit the the limits he himself has set, and be content with his profit... until he begins again...

It's painful to see the market getting away with you after a trade like this. I am too worried about having let this one get away, and about uncertain future price activity, increased volatility and quick reactions to trends, to open any new position right now. It is hard to comprehend the combination of factors that can prevent a trader from ever making any real money. To comment on this page, please get in touch