Posted By: Ilan Levy-Mayer Vice President, Cannon Trading Futures Blog
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. Do your homework, look at price action during the last few FOMCs.
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A Trailing stop Tweak by John Thorpe, Senior Broker:
When traders decide to deploy trailing stops, they may decide to take a look at avg truer range to determine volatility of the market so they have a better gauge of how much to risk on each trade and how likely, if they are correct about the direction, will they be to successfully set the trailing distance. Tweak your stops to reduce the risk to your Net Liquidating Value.
Whatever indicator or set of indicators you like to use to determine how many points the market must travel before your stop automatically modifies and moves to your new “Protection Level”, I think all traders agree when this happens, we have a winning trade on the books., Typically the worst we will get filled when the market does change direction, with a little slippage is a trade that finishes in the black!
What happens when the stop doesn’t trail, a hard stop is elected the market takes the position out, with a little slippage, below our breakeven? The trade ends in the red.
Whether you trail or use a hard stop, stops are part of risk management and in my opinion
, essential to long range trading success: use stops or trailing stops. If the stop never trails, the trade will end with a predetermined loss,(less slippage and fees) , Some people like to set stops after they enter the market, (some say they do but rarely will). I do.
The importance of using stops can not be understated. What I do once I have determined how many ticks I will use for my trailer, is to place the Trailing stop LESS THAN my hard coded distance E.g. hard coded trailing distance is 20, I will place the stop at 12 or 14. That way, if the market modifies the stop at least once, the trade will do better than break even by 6 or 8 points less fees rather than getting stopped at breakeven less fees. If the stop modifies twice then I have the potential for a 34 to 36 point gain on this trade, less fees. If the position gets stopped I will not take a 20 point loss, rather a 14 to 16 point loss.
If we always place the trailing stop at the same distance when we initiate our entry trade, we will always do worse than breakeven if we get stopped out. If you loosen your trailer and tighten your entry, you might just turn the account from red to black.
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