Does Your Stop Level Make Sense? Why You Should Always Evaluate The Market Near This Level
You will recall from
yesterday’s column that I stressed the need to be objective about
entering, and more importantly, exiting trades. The market is notorious for
shaking you out of trades at the worst possible time. Yesterday offered a good
example, yet I did not follow the rules, entirely at least. Let’s review:
After the big burst to the upside in the morning,
the market pulled back a bit, as did Citigroup
(
C |
Quote |
Chart |
News |
PowerRating). By this time I had already shifted to a 5-minute time frame to
identify entries. This is what I saw in the S&Ps and C:
Both were showing good consolidation after the
pull-back. The stochastics were beginning to hook around and the highs of the
day were just a few cents above. A good recipe for a continuation long. I
mentioned the long in C to
the room, and we got in at 44.90 with a stop loss of 44.74, the low of the
previous leg down.
So, was the stop-loss in this case a good idea?Â
I do not mean not having a stop-loss, but perhaps adjusting it as the price
closed in on it. Well in retrospect it is always easy, however, let’s look at
the dynamics at the time:
1. Stochastics were beginning to get oversold; a
bounce was due.
2. On the S&Ps, the 20 ema had not been violated
all morning.
3. The lower Bollinger Band was also at the same
level as the 20 ema, also indicating a bounce.
Yes, I was stopped out and ultimately the trade
would have turned out to be pretty much a scratch; however, could the loss on
the trade have been minimized? Perhaps. My feeling is that there were too many
reasons to expect a bounce and not remain so rigid on an arbitrary stop. My
point is this, stops are obviously a necessary pre-requisite for successful
trading, however, it pays to evaluate the market as your stop price is being
approached, does that level still make sense?
| Support/Resistance Numbers for S&P and Nasdaq Futures |
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As always, feel free to send me your comments and
questions.