Setting Stop Loss As An Open Order

[RyanM 1]

Greetings BBT Fam,

My name is Ryan and I have been trading for the last 7 months, about to close out my first month live (and in the green)

In almost every angle, I have become comfortable and confident in my strategy. One piece of my strategy that I simply have not been able to become confident in is how to handle my stop losses. Yes its easy enough to say that one must ALWAYS obey their stop losses, but my concern is with regards to placing an order at my stop loss level.

I enter my positions using a hotkey that automatically adjusts my share size based on my risk, and then immediately use another hotkey to place an order that exits the position in full if it reaches my stop loss. I have come to love this system, however on several occasions I have heard people saying that you should always use manual stop losses. I have heard 2 reasons for this.

First, others can see your open order and use it against you. While I am certain this is true to some extent, the other issue is the one that bothers me more. That you dont want to get stopped out during a quick "pop" that in most cases will immediately correct.

Breaking down the comparison between setting your stop to trigger automatically vs manually, the only real advantage I can see towards manual (ignoring level 2 manipulation) is that you have the option to IGNORE your stop loss during a pop. This has always seemed to me to be a dangerous consideration. The idea that most of the time the pop will self correct and rescue you seems reminiscent of our consideration regarding averaging down. Most of the time it will work in your favor, but those times it doesent will destroy your account.

Today I took a single setup, it was a beautiful setup that I am proud of, but it did not work. My stop order triggered during a pop and did not fill until it slipped much further down. I lost nearly double my R. Had I had the option to recognize the pop and ignore it, I would have been able to get out at break even, which would have been lovely, but it could have just as easily continued to tank until I had lost far more still.

 I have tried to reconcile this, but I have never been able to, and so I am seeking advice. Can anyone shed some light on this? Please convince me that manual stop losses truly are the way to go. Its scary maintaining a piece of my strategy that goes against the masters!

[Robert H 455]

I've faced this dilemma myself. Firstly, I try not to think about market manipulation or stop hunting. There are thousands of other shares being displayed on level 2: I doubt the algos are coming after my measly lot.

On one hand, using hard stops removes the emotional/human element. The risk is slippage, sometimes doubling your loss. This has happened to me numerous times on volatile stocks and especially at the Open.

On the other hand, manual stops let you exit based on discretionary factors. The risk of prices not coming back after a pump or dump is very real. I believe these types of flushes are what causes traders to baghold beyond their original exit point.

My solution: use mental stops in the first 15 minutes or so, or use them on spready big movers. Switch to hard stops on liquid, high volume stocks after the craziness of the Open.

In other words, use discretion to decide whether a hard or mental stop makes sense. Since individual setups/tickers are unique in each moment, there is no one-size-fits-all solution to our predicament.

I've never tried using stop limit orders. This basically says "get me out when the price hits X, but no worst than Y." You can avoid slippage this way, but the fact remains that you can get stuck in a position beyond your stop.

[WilliamH 67]

Ryan, seriously great question, and before I say anything else, please let me ask you this.

Realistic scenario 1-

1. You put a hard stop and ignore it . . . a "POP" happens that you didnt see and you get stopped out . . .

 

Realistic scenario 2- 

2. You are staring at the chart with your manual stop in mind with your finger on the hotkey to close out if it gets to your stop. . . 

It Goes down to your stop on what appears to be a "POP" . . . In this scenario, what is your course of action? What do you do to determine if it is a pop or not? I know some traders count to 3 and wait to see if it recovers or not. So again, how do you react to this scenario?

[BrianS 5]

To stop or not to stop, that is a really good topic.  Aside from Robert and William's spot on analysis I would like to add the following to the discussion.

I have learned that after I take a trade with a setup I like, that I have a hard time exiting when the setup is no longer valid. Worse, more times than I want to admit, I start hoping for the price action to be a simple pop that will recover my way.  Early in my trading, I lost a lot more than I should have becoming a bag holder.  Then, every so often you win on one of those stupid bags you're holding so you start thinking it is okay to hold losers again.  I thought I had cured this tendency to hold too long, but I have found that exiting losers is still really hard for me.  This calendar year, I have let this happen on three trades that really offset a lot of otherwise excellent trading.  After 18 months live trading, I know better.  I am also quite risk averse in my normal financial dealings which makes this behavior out of character.

This long and kind of embarrassing story about my stubborn and strange behavior that overrules an otherwise reasonable person when in a trade has lead me to believe that I always need a hard stop and I will simply live with the slippage when it happens.  I will think of the slippage and very occasional loser that would have turned to a winner as an insurance premium that keeps me from blowing up my account so I can live to trade another day.