Placing Stop-Loss Orders by Curtis Arnold Unsuccessful small speculators tend to waste time and money trying to reinvent the wheel rather than using what has proved to work in the past: Trade with the trend, cut losses short and let profits run. Here, STOCKS & COMMODITIES contributor Curtis Arnold assumes that you accept those investment tenets and aspire to adhere to them. If you do, you will greatly benefit from this lesson on the correct placement of stop-loss orders. When you talk about stops, you're talking about an exit system. An exit system is the most difficult part of any trading plan to create and implement. An exit system must work hand in hand with an entry system; they must be designed together and complement each other. For the purposes of this article I have assumed that because you intend to let your profits run, you want to catch big trends. I will also assume that you will not use price objectives. If you employ price objectives (that is, placing limit orders to exit a trade at a predetermined price), you are using a trading technique that, by definition, defies letting your profits run. Finally, I will assume your entry system serves to place you in a trending market. Given that these assumptions are true, how do you place your stops to cut losses short and let profits run? Those objectives can be met by employing two kinds of stops — one to limit losses and one to retain profits. INITIAL STOP The initial stop should be determined beforehand and given to your broker when you receive your fill on your entry. You have a choice of using an open stop (also referred to as good 'til canceled) or a day stop (that is, good for today only). With the use of the day stop, you will need to place the stop again the next day. With the use of the open stop, your stop will remain in place until you cancel it. You must remember to cancel the order if you roll forward to another contract month. In addition, when you wish to change the stop price, you will need to place a "cancel or replace" order that cancels the stop at the former price and replaces it with a new stop at another price. |
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