Secret Trading Tip #1 : Trade with a Plan – Using a Stop Loss

In my opinion, every trade you consider should be laid out ahead of time with a roadmap. A complete map should have an “off ramp” or a place where it makes sense to enter the market. It should also have exits for your destination (profits) as well as off ramps for emergency exits. This part of your plan will likely include stop orders.

Stop orders placed to potentially close an open position are called stop loss orders

A stop order is a contingency order. It is triggered only comes into play at the price level specified in the order. In other words if the market never trades at that price, the order will never become active. The caveat to this is the fact that the market can sometimes gap through your price, at which point the order would be executed at the best possible price. This unfortunately has the tendency to open up the trade to the possibility of getting filled at a far worse price than the one specified in the stop order. So, in summary, a stop loss order specifies a price level at a point and beyond where your order will be triggered to a market order.

Stop loss orders are like big signals where you will pull out of trade

Based on how they function, stop orders have very specific placements. Buy stop orders are placed above the current market price. Sell stop orders are placed below the current market price.

*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
CHART COURTESY OF GECKO SOFTWARE.

They work when the market trades at or through the specified stop price level. Once the price is hit, it becomes a market order and is executed at the best price available. Here is an example of a stop loss for an open long position (one that was initiated by buying a contract):

Sell one December e-mini S&P futures contract at 1335.00 stop.

The mechanics of this trade would work in a straightforward way. It would have to be placed below the price level the market is trading at so for this example, assume the market is trading at 1338.00. Normally, I recommend placing a stop loss order 3 points or less from the current market price. So if a long market position was initiated at 1338.00, this stop was placed. If the market starts to trade lower and hits 1335.00, then the sell stop would be triggered and the order would be filled as a sell at the market.

If the market price gaps lower, say 1330.00, the stop loss would still be triggered and the order would be executed at the best possible price. That might mean any price at or below the 1330.00 point. You can see how the gap is something to be aware of.

The same concept applies to a buy stop order. Consider the same example as a buy stop.

Buy one December e-mini S&P futures at 1335.00 stop.

The order would have to be placed above current market price, so keeping with the idea of 3 points or less, assume the market is trading at 1332.00. If the market trades higher, against your open short position (a trade initiated by selling a contract), the order would be triggered once it touches or moves higher than 1335.00.

Traders can use a stop loss order and trail it behind an open position as the market moves in their favor

Stop loss orders don’t go away if the market is moving in your favor. You can trail them to keep them within 3 points or less of the price level the market is trading at. In this way, you can actually try to use your stop loss to protect unrealized profits on an open trade. As long as the position does not get closed by getting filled on your limit order (Secret #2), you could keep rolling or trailing the stop loss order.

In this way, stop loss orders remain a key component of any trading plan. They are like a safety net, and they can help you try to keep emotion out of your trade. Knowing when to cut your losses and exit a trade can help traders keep things in perspective. Too often people can fall into a trap of holding an open trade that is moving against them, hoping that the market will turn back in their favor. Making a roadmap and sticking to it can help you avoid this pitfall.

Larry Levin
President & Founder- Trading Advantage
larry@tradingadvantage.com
888.755.3846
312.235.2572

Weekend Commodities Review : Special Report for March 28th, 2011

The End of the Commodity Boom

Welcome to the calm before the storm.  I believe we are still in a deep global economic recession, but the rate of decline has clearly stabilized in recent months and if investors feel that the stability is giving way to more economic slowdown then the stock and commodity markets are expected to take big hits. Let’s not forget that the stock market nearly doubled in just 2 years and commodity prices like oil have about tripled from their lows. To me, these are overbought market conditions that beg for a reason to reverse, and that reason is upon us. Why do you think the stock market took such a big hit when the threat of an economic downturn in the 3rd largest economy in the world made headlines? Without demand there are no profits.

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In commodities, demand is often a fairly stable situation while supply receives much of the analytical focus as fluctuations due to weather, politics and other less predictable events are frequently the catalyst for big price moves. However, when the world demand variable becomes such a moving target as it has been over the last two years, the focus shifts to what the growing population of the world will demand in several key commodities. Thus demand-based shortages become a volatile reality, and the slightest shift in outlook can wreak havoc on commodity prices. If demand is the focus, as it should be, then what happens when growth slows or stops altogether? What happens if or when China slows? What happens if Japan goes into another recession? What happens when the European Union gets hit with another Greece-like economic crisis? To put it simply, the pricing outlook for stocks and commodities need to be adjusted to account for major drops in demand.

It is important to acknowledge that the risk of change in consumer confidence and market sentiment has become over weighted to the bearish side.  This means that the risk of a negative turn in market psychology outweighs the potential benefits from a continuation of the bull trend.  Therefore it becomes a matter of events, or catalysts for lack of a better description, that will turn the tides.  The political tensions in the Middle East, China’s possible slowdown, Japan’s environmental crisis – take your pick.

The trend is your friend?  The easiest thing for any analyst to do is ride an existing trend while, in contrast, the most difficult is calling the potential turn.  I have spent my career working to call market turns, being a contrarian when I feel I need to be, and telling it like I see it.  Granted, following 20+ markets and calling major market moves consistently is no easy task, and with that job comes failure as well as success.  My life experiences in this business have led me to this very important time, this period in commodities that will likely never be repeated in my lifetime in the same way.  Many investors will continue on betting the bull and potentially lose everything on the turn I see coming in the markets.  For those that have the change to try to get ahead of the correction I believe there will be one of the greatest opportunities ever presented in the commodity markets in the next several months.

On April 5th I will be releasing a key report that identifies 3 markets I expect to collapse before June 30th.  I will show you what markets to focus on, explain why I believe they will collapse, and provide specific trades that aim to capture that bearish forecast.*Disclaimer: There is risk of loss in all commodities trading. Losses can exceed your account size and/or margin requirements. Commodities trading can be extremely risky and is not for everyone. Some option strategies have unlimited risk. Educate yourself on the risks and rewards of such investing prior to trading. Past Performance is not indicative of future results. Information provided is compiled by sources believed to be reliable. Futures Press, Inc or its principals assume no responsibility for any errors or omissions as the information may not be complete or events may have been cancelled or rescheduled. Any copy, reprint, broadcast or distribution of this report of any kind is prohibited without the express written consent of Futures Press, inc.