You have to use stops to limit your risk. However, beware there are trading robot-worms, what ever you want to call it, which seek out stops. I believe they take a trading range, and then calculate where the average trader is either long from or short from. There are people who have asserted that there are artificial intelligence programs which mimic human behaviour, and then the computers are programmed to go to those stop points. The points are arbitrary, and most likely the result of a complex logarithm, but I would have to argue that they are there, lurking in the shadows.
I cant’ tell you how many times, when the pits were open outcry, that I would leave a trailing stop to protect a winning position. And my stop rarely got filled. Two years ago, when the programmers got their hands on the grains, they created a new matrix, literally.
Now, I know that if I leave a stop order on the screen, very often there is a 90 percent chance that it will be filled. It makes no difference if I put it close or within 5 cents. The new levels of volatility have made it almost a forgone conclusion that your stop will be found and triggered
That is the only conclusion I have come up with since the markets became almost totally computer driven.
So, how does one use stops and not automatically have them triggered? The key is to trade 1/2 your position size for longer term trades. And, I believe you must consider where you normally would put your stop, and then add a factor of 1/3 to 1/2 more to the placement. So if you normally have 4 contracts on, if you are leaving with a trailing stop, cut your size to 1 or 2, and instead of having your usual stop loss, for example, in the grains, it might be 2 or 3 cents, you have to be willing to pick your stop, and then add another penny and a half or so to protect against these trading worms.
In the S&P minis and Dow futures minis the same tact must be followed. Trade as small as possible, place your stops at odd numbers and hope for the best.. You still will probably be stopped out occasionally. But the near 100 percent success rate of the computer worms searching for these stop orders might be cut to 50 percent effectiveness, if you place your stops far enough away from major support/resistance levels.
Like I said, you have to use stops to prevent against huge down drafts in your account equity. So either 1) trade smaller and have much wider stops, or continue to be stopped out 90 percent of the time. If that’s the case, then you must have a mechanism for the remaining 10 percent of your trades to run profitably for as long as possible.
Its not an exact science, but you have know that these computer worms are out there searching for your stops. 24 hours a day.
Good Trading
