Welcome back to week 4 of my futures trading bootcamp.
This week we are focusing on the less glamorous, but no less important topic of setting stops.
There’s a saying that you’d all know, “A dollar saved, is a dollar earned”.
I like to translate this into trading speak and say, “A tick saved, is a tick earned.”
And there’s no better way of illustrating this than with setting stops.
Conventional wisdom suggests that if you have a set stop loss, you simply use a market order and exit.
However when we’re using a DOM we need to use a little more finesse.
Because the truth of the matter is that when we reach our stop level, we have a few considerations that we need to take into account:
- How liquid is our market?
- How urgent do we need exit?
- Where is our exit order likely to be in the queue?
So let’s address these.
In terms of liquidity, if you’re trading a very thin market like the DAX, then your only option might be to exit with a market order.
If you don’t you risk your position going 20 ticks offside and that single trade destroying your day, week or even month.
If however, you’re trading a slow moving bond, then you are likely going to have every chance to simple work a limit order and save that extra tick.
This is also affected by the urgency in which we need to exit.
If it’s a news based move, for example something has occurred by coincidence and not related to our initial trade idea, then we might want to exit immediately.
If the position has simple ground against us slowly and our setup is now, “void”, so to speak, then we can likely work an exit.
Finally we need to use our DOM skills to access to likelihood of getting a fill if we use a limit order to exit.
If the market is thick and slow moving, but there is a lot of volume going through each of the price levels, then you should really consider working an exit.
If you’re stuck at the back of the queue and you’re unlikely to get a fill, then you might need to consider exiting at market.
The reality of the situation is that this is a bit of a look and feel process.
It’s going to be up to you to access your market firstly, then the reason behind the stop being triggered. And finally the likelihood of a fill.
Again practice makes perfect.
Continue with our exercise on spotting setups using order flow, volume ledges and now correlations.
But this week put a real focus on setting stops.
You want to really set a level that you feel comfortable with.
I personally use a set level, in something like the ZN.
So that might be 3-4 ticks.
But that might change with market conditions and your personality.
Stop size will have a direct correlation with the amount of winning trades we have.
As a general rule I like to be right around 2/3rds of the time.
So we need to have a level that lets our trades breath, but not so much that they are costing us too much on the losers.
So practice and try different levels and focus on trying to exit at that level using a limit order if you can.
It’s a good idea now even in practice to record every trade, even on a simulator.
Make an excel document and record the reason for the setup, the exit level etc and start to build an objective measure of your winging and losing trades, so it becomes clear where your strengths and weakness are.
From there you can start to refine and build on your setups and exits.
Remember, “A tick saved, is a tick earned.”