Using Stops

K

KGTrader4

When you establish a position, and use a stop to manage the downside, do you actually put in a stop, or do you use mental stops that you establish when buying. (Or selling)

ive always felt like putting in a stop is inviting the market maker to grab your shit at just the wrong time. On the other hand, a mental stop doesn’t really help keep you disciplined.
 
Depends on what you trade. If you trade stocks, you can put in a hard stop loss on a GTC basis. That protects your capital from huge losses. Options, you need a mental stop as the bid and ask spreads are wide. Otherwise, the slippage is huge and would be very costly. Use a stop loss always. The market makers gun for your stops but, that should not stop you from using stop losses. It is a tool to protect your capital and if it goes your way, to protect your profits. You have to be disciplined when you trade, you cannot be willy nilly. And if you do not use stop losses, good luck to you. There will be days where your trade goes against you suddenly and you are in for a rude surprise of huge losses----all because you did not put a stop loss in.
 
SmallFil, thank you. I only trade equity, not options. And I’m fairly new to trading, not trading much right now because of the environment and still trying to formulate a strategy and find my edge.
I should add to my question, when you use stops, do you use straight stops, or stop limits?
 
Stop limits are not the same as stop losses. Two different order types. A stop limit triggers when it hits the stop price but, becomes a limit order. On the other hand, a stop loss triggers when it hits the stop price but, becomes a market order. A stop loss is designed to exit the trade pronto. A stop limit will not execute until it satisfies the limit price since, it is a limit order.
 
KGTrader4 said:
When you establish a position, and use a stop to manage the downside, do you actually put in a stop, or do you use mental stops that you establish when buying. (Or selling)

ive always felt like putting in a stop is inviting the market maker to grab your shit at just the wrong time. On the other hand, a mental stop doesn’t really help keep you disciplined.
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You must use stops. Exactly how you do it is somewhat arbitrary and personal choice. There are no hard-and-fast rules of "how" or "how much to risk". While the purpose is protect against "single large loss", traders often had a difficult time with them.

A stop limit won't protect you at your limit price from a large gap down if the price blows past your price.
 
If I buy a stock at 20, and put in a stop at 18 with a limit of 17 1/2, and the stock opens at 12 , I would probably rather not sell it, thinking the pendulum always swings too far in the other direction at the open I’d rather have a chance to adjust my limit to say 15 or 16.
That’s what I mean by protecting myself with a limit

OK I’m guessing what you mean is it’s not gonna protect me because if it opens at 12 I should be out of it at 12
 
KGTrader4 said:
If I buy a stock at 20, and put in a stop at 18 with a limit of 17 1/2, and the stock opens at 12 , I would probably rather not sell it, thinking the pendulum always swings too far in the other direction at the open I’d rather have a chance to adjust my limit to say 15 or 16.
That’s what I mean by protecting myself with a limit

OK I’m guessing what you mean is it’s not gonna protect me because if it opens at 12 I should be out of it at 12
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That's your judgement. EVERYTHING having to do with stops (except whether or not to use them "at some price") is a guess... some better than others.
 
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During the flash crash of may 2010 a lot of loss limit orders were ignored and skipped over. You can check the boxes in IBKR for GTC and "fill outside regular trading hours" and maybe can get out during pre-market on a gap down,but its always a crapshoot.
 
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