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Strategies & Market Trends : Systems, Strategies and Resources for Trading Futures

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To: Tom Trader who wrote (6086)	10/11/1998 2:45:00 PM
From: SE	Read Replies (1) of 44573

Tom, I have been thinking about something I think you stated with respect to volatile markets and stops. I believe you stated that you must give wider stops in volatile markets. I wonder about that. I think an argument can be made for tighter stops. Where is my thinking incorrect? OK, so we have a volatile market and an entry is made. You want to grab 10 points on a trade, you say you think the market will tank by at least 10 points and you are willing to risk say 5 points. Set the initial stop at 2 points. If you are wrong in your entry, you get stopped out after a 2 point loss and you must look for a better entry. Sure there might be times that the market reverses from there, but I wonder what the occurance is of reversing from there and "missing" the move, vs. the occurance of running up another 3 or 4 points in a volatile market? In essence, putting a 2 point stop in gives you two chances at getting the entry correct as opposed to putting a five point stop in and missing the move as you might not re-enter the trade. The tighter stop has a built in plan to "re-enter" as you have built in two entries for the price of one. Also, what about protection of the gain? If you have 6 points in a trade you hope to get 10 in, do you leave your stop at a 5 point loss? I cannot imagine the reasoning for that....instead I would think it would be prudent to move the stop to a 1 point gainer or better. As the market gets to your 10 point target I would think moving the stop tighter and tighter would make sense. You can always re-enter... So if you have your 10 points and you now think you might get more, maybe the stop is 2 points away...to preserve an 8 point gainer. If it runs against you 5 you can always re-enter 3 points to the good. You would then have banked 8 and if it keeps going against you, you might take it off after a 4 point loss from the second entry....in which case you still have 4 points to the good....whereas under the other scenario you would only be 1 point to the good. Does this make sense? It does mean being more active in the trading. Is this preservation of capital and profits or is it a method of simply eliminating the possibility of the big winner? I am not sure, but they are some thoughts I was having. Maybe it depends upon your trading methodology and either method is legit depending. The above appears to be more fine-tuned to a short term trader whereas wider stops appear to be more in tune with a position trader. Thoughts anyone? -Scott

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