Moving Stop Up to Breakeven: Helpful or Harmful?

[MuskokaJoe]

One, any discretionary trading I do, the BE stop is a disaster. If the first time you think to use it, u instead exit immediately you'll be far better off. I believe this is because just when you think you have a "runner" and should trail the stop, is just about the time everyone else is overly optimistic as well.

Two, empirical testing leads to the same conclusion. Moving the stop to a smaller risk point is good, moving it ahead of the enty I have never seen work optimally real time or historically.

Three, anything that has intuitive merit in the market is almost always the wrong thing to do.

 

[fxintruder]

Quote from Tommy Ryan:

fxintruder ...

I'm always curious as to whether FOREX traders are concerned with counterparty risk. Obviously some of the major names have solid balance sheets but many don't.

I, for one, take great comfort in having a clearing house guarantee futures trades.

Forex is an OTC market like some forwards market, but clearing is not needed. When you're long you buy a currency and sell automatically in the same trade the antagonist one (like spreading futures), we can say for example you're long on EUR versus USD (it's known as pair and quoted by the exchange rate). In other words there is nothing to deliver because you really bought Eur and pay it by selling US dollars. You close your positions and win or loose the difference in the exchange rate at the time you close (no limit date). The main forex brokers dont allow you to go over your deposit and they close automatically your positions before you fail. One thing to know is that forex is the biggest market in the world, many many times bigger than the stocks and all the derivatives markets gathered. There is no lack of liquidity in the 4 main pairs (eur/usd; Usd/Jpy; Gbp/Usd, Usd/Chf) and their crosses (ex: Gbp/Jpy). It'a nice and very fast market, we can say every pair is a market. I like forex.

 

[Tommy Ryan]

fxintruder ...

Having owned small investment banking operations in the 70's in NY, London and Lugano Switzerland I understand how the FOREX market works, Intrudee; but what I don't understand is how traders are willing to leave ten's of thousands of dollars on deposit with small counterparties. Any bank with less than a billion in footings is tiny in that market.

The counterparty risk is enormous, unsecured and not guaranteed by a clearinghouse. Using a Futures Broker or even an introducing broker assures that your funds are on deposit with a clearing house member which makes that risk, to a degree, a collective risk for the members.

If your counterparty goes down you get pennies on the dollar two or three years down the road ... if anything. If I were to trade FOREX I'd certainly want to use Deutsche Bank or some similar "whale" as my counterparty.

I think it is important to realize that while numerous financial intitutions have gone broke over the past century -- leaving counterparties holding the bag for great sums in some instances -- in the over 150 years that futures clearinghouses have operated in the US not a single one has blown up and not a single penny of customer funds has been lost in counterparty risk.

It is not unusual for larger size FOREX traders to do a trade in what is in effect the OTC forward market and as part of the terms of the trade bring it to an exchange and "rerun" it there. Frequently when one of the weaker counterparties has a side in a decent size trade -- 1,000 lot or better -- this "baptism" by an exchange which transfers counterparty risk to the clearinghouse is effected.

Every FOREX trader should consider their counter party risk ... particularly in these turbulent times.

 

[fxintruder]

I didn't understand at fist you were questioning about brockerage risk.
You are absolutely right, and there is not much solutions to avoid that .
If you're highly funded (more than 1M) you can go through a bank directly connected to the interbank rates.
Else you can choose a big ecn and see if at least your floating capital can be protected by their insurance (like sipc with IB).
You can also choose a well capitalized broker localized in UK (if you're a non US citizen) and open a real segregated account that can be protected by the regulations laws (fxcm,gft) 45K pounds.
You can go with a dealing desk solution(high spread and frequent requotes) with saxobank (danemark) and you're protected by danish laws till 50 K Eur.
But you're right inothing is like a clearing house.
In US the new NFA requirements had clean the place and many bucketshops are pushed to close. I hope it's just a begining.

Sorry for this offtopic.

 

[Indrionas]

Moving stop to breakeven reduces your % of winning trades but decreases trade risk. So it has both sides.

 

[osorico]

RULE: Never let decent profit turn into a loss.

YOU must define "decent", based on trade entry criteria, expected hold time, and the ongoing dynamics of the market and the instrument traded.

Trading with rules is always helpful in the bigger picture. The bigger picture... being able to play the game again.

Osorico

 

[rickf]

My strategy on break-evens:

if I double-down on a trade to lower/raise my average cost of a position, I will exit half my new position at breakeven (or BE+1 tick to cover commissions) and then let the rest ride if the trade is still working for me; if not, I will exit completely at BE or soonafter and reassess things.

 

[limitdown]

Quote from jbob:

You enter the market and the market quickly moves to give you a profit. Therefore, what should do with this potentially great trade? Let's punish the trade and move the stop up to breakeven!

The market is showing strength, so why should you jump out at weakness just because it retraced to your entry. Shouldn't we be riding our trades? You have your initial stop in place if the market truly does become weak.

all depends on the fluidity of the underlying,

in stocks, that's one thing, since they do not expire and you can hold them long term

in options and futures, there's a time element and value that needs to be preserved along with the potential profit that the favorable market movement is showing, in your example...

in longer term holds, wide stops keeps one in a move longer term, however, one need endure coming back after several points profit to B.E. and resuming the uptrend.

some find those whipsaws unacceptable....

the concept of tightening one's stops has to be gone over in advance of implementation so that there's no traders remorse....

best strategic advice I can give for free...

paid advice is much more customized and current

 

[Forrest Gump Jr]

I would have liked to vote in this poll, but unfortunately the correct answer is not a choice.

The correct answer is it depends.

What does it depend upon?

It depends upon market analysis.

Market analysis will answer any and all questions which needs to be answered.

 

[Bootsie]

Quote from jbob:

You enter the market and the market quickly moves to give you a profit. Therefore, what should do with this potentially great trade? Let's punish the trade and move the stop up to breakeven!

The market is showing strength, so why should you jump out at weakness just because it retraced to your entry. Shouldn't we be riding our trades? You have your initial stop in place if the market truly does become weak.

You need to be more specific with time frames...

"The market quickly moves"... then yes, take some profits. If you decide to keep your original stop, take some profit. This way, if the trade takes out your original stop, then it's a risk free trade...

Otherwise, if swing trading, don't dump the trade until the pivot points are broken.

JMHO