How to Trade Using Stop Orders

Stop: Making Cents

From this point forward, I want you to start trading the way pros trade. That includes holding periods, use of leverage, compliance, company location and structure, and how you enter orders…and that’s what I’d like to discuss today.

If you enter and exit “at the market,” you’re reacting, not trading. Stop. I know it’s hard to get going in trading, but it’s also important that you DO NOT develop bad habits at the beginning.

If you do, and no one tells you the difference, then your bad habits become your overall habits because you don’t know what else to do. I want you to stop entering trades at the market and start using Stop orders to enter and exit trades. It means a lot as you’ll see – please read on and watch the video.

You need to uptime (study the weekly and monthly charts) and see the significant points of price and volume reference. The daily volatility within intraday charts means that there is a high degree of randomness to the data, and your getting knocked out of the trade or making money will be just as random.

It’s bad to be in those types of trades all the time. You want to get stopped out of trades because of something significant, not daily noise or the pond scum of headlines, tv chatter, or worse…your social media feeds.

I know of only two men who have traded 3-5 day swing patterns consistently well for several decades: Scott Kaminski and Victor Sperandeo. That’s it. IMHO, you will not become one of them. Your main tool should be to uptime, not downtime. I don’t know anyone who can consistently trade shorter periods of time and be profitable. If you want to trade shorter periods of time, consider becoming a HFT. They are the ones who are killing you each day in day trading.

Register for the upcoming webinar with Victor Sperandeo on January 14

Why do all that work and not make as much as you can?

Why are you afraid to take positions home overnight? That’s how you leverage your time…

I am a position trader. I leverage my work, my time, and my capital via margin. You should start thinking this way also. Else, valuable time is passing you by – not just in profitability, but in the necessary amount of time it takes you to repeat the daily process that will ultimately lead to your success as a trader. You need massive amounts of repetition (and you need to survive frequent losses) and that takes time, just like if you practice anything else in your life.

Many traders with a short-term mindset try to trade and get frustrated, they quit before they really start. They refuse to TRY to get comfortable with longer holding periods and contend that trading longer time frames “doesn’t feel like it’s a good fit for me.”

To this I say bullshit. Making lots of short-term trades gives you an illusion of control. You are not in control. Trading activity, ie making transactions, does not equal trading. Sometimes no activity is GREAT trading. I have gone 3 weeks with no transactions, yet I was trading at my best. Think of it as not going for the head fake…

You have to be able to “stop” and say “not today.” Swing trading is another matter altogether and we have resources to help you with that. But to be completely honest, I would bet against your becoming a success as a day trader that’s how strongly I feel about it.

Stop: In the Name of Love

Do the work at night in the calm, not in the moment of the trade. This will cut your anxiety down as well as other emotions that will work against you during the trading day. You probably know to place protective stops in to limit your losses, but you should use them to ENTER markets as well.

Let the market come to you…just like waiting to catch a wave to surf. Newer traders especially do not have the skill or the temperament to try to trade on the fly.

Pick your spots the night before and enter:

Buy Stops above the market to enter Long
Sell Stops to enter Short
Buy Stops to cover Short
Buy Stops to add to existing Long winners
Sell Stops to sell Longs
Sell Stops to add to existing winning Shorts

Let the prevailing market auction process unfold and don’t get caught up looking at intraday bars. Despite any trading rules you’ve been taught, you cannot get out of your own way by making hair-trigger responses to the market on the fly.

You can do this whether you’re running a system or looking at charts. Professional traders enter and exit the market with Stop orders.

The fairy tale is that sitting in front of the computer and “watching it” gives you more control is an illusion. You are powerless. I don’t care if you have “hot keys” programmed or if you are trading with a mouse. You will have much more of a peaceful, and less stressful time trading if you put your stops in ahead of time and let the market activity unfold. If the market does not come your way, do it all over again tomorrow.

Trading from the otherwise is a very disadvantaged place to trade from. A few things I hear from amateurs frequently are:

a) “I’m going to get picked off or my stop will get run.” My answer is “yes” if you are trying to day trade, you will get eaten alive financially and emotionally wiped out frustrated by the HFTs.

b) “They will reverse-engineer my system.” False. No one cares about an unknown trader and his system. Furthermore, if you give yourself enough room to be wrong or to take into account the daily volatility, you’ll be ok over hundreds and hundreds of trades. Sometimes you do get knocked out of an otherwise good trade, but that is as much random bad luck as anything. It will happen.

Don’t Stop ’til you get enough – Adding to Winners

Day trading also very limiting because you only trade 1 risk unit in and out. Since the intraday data are completely random, you’re likely to feel like you’ve worked hard, but don’t have any money to show for it. Cleared $200 today for all your hard work? Congratulations, that’s slightly more than what you can make flipping burgers at 5 Guys.

Chasing trades is an emotional ritual that you might get hung up on. You can place a second stop in the market above your initial entry. In fact, there have been days where I’ve entered 2 or more Buy Stops above the market to get filled on several risk units.

I’ve seen where clever marketers who don’t trade will tell you that “system trading removes the emotions from trading.” Nothing could be further from the truth. Whereas a ’system’ will do the calculations for you, YOU still need to enter the trades…and that is the point of where your emotions kick in.

If you’ve lost several times in a row, or you are down 15%, and all these results are ‘in model’ you still have to get up the courage and the discipline to enter your stops. No system in the world is going to cure your internal issues. Like I wrote in the book, “there are no external solutions to your internal problems.”

Don’t Stop Thinking About Tomorrow

Do you homework the night before and therein is your trading plan for the next day. Simply enter your Stop Orders and let the market come to you. Turn off your screen, turn off the tv, x-out of Twitter. Go have fun or do as I do at this point: read. You’ll get an alert if you’re filled and then you can enter additional Stops to add to winners and also to protect your capital.

Don’t Stop Believing

If you don’t get filled today, re-enter the order the next day and adjust if necessary given the previous day’s action. You have to have the discipline to enter your stops and be faithful. Sometimes NOT getting filled on a trade is the best thing for you. Pick your spot and stick to it.

You can enter and cancel Stops all day long and they won’t cost you anything. Think of them as a living and breathing shopping list. If they don’t get filled, they are cancelled. I don’t normally enter trades GTC, but you might feel more comfortable doing it that way.

Each day, I enter and re-enter my stops and let the markets come to me. It’s a very peaceful way to trade. If I don’t get filled, I neither have regret missing our nor fear what might come tomorrow. I have a plan.

Unless you’re a disciplined yogi, it’s hard to process your feelings on the fly. Making buy/sell decisions on the ES is wrought with dicey times. You can’t wait to get in because you feel like you’re missing out. Or, you’re afraid to make the trade and you eventually get in too late, then you have regrets.

This is especially true if you’re a short-term or short-time frame trader. Do yourself a favor, and stop doing that. If one of your Stops gets filled, you’ll get an alert to enter a protective stop and another stop to add to your winner.

Here’s an example…

The S&P (ESH15) corrected from 1960 to 1800 – 160 points or about 8% between October 3 and October 16 before it recovered (and then some). If you trade the ES, how much did you pull out of the move? How can you possible feel like you’ve accomplished anything by taking 20 points of of that market? And if you don’t have it in you to trade the ES, did you express the trade via an ETF or via options? I’m not here to humiliate anyone, but you have to have strict and rigid honesty with yourself. If you don’t like the dynamics of commodity futures, you can always look at ETFs or options as vehicles to express the trade.

Scott Kaminski nailed it in his research and he and our students caught most of the move and repositioned to get long after the reversal. Yes, there is trial and error here: sometimes you need to make several attempts to get back Long because you get knocked out, but you stick to your ethos because you know it has positive mathematical expectation over hundreds and thousands of trades.

You’ve got to let go (Surrender was Chapter 2 in my book) and let time and leverage work for you. You have to stop working so hard for so little money. Bigger gains are not that far away if you just stay out of your own way. Think about it: you’re already in the just have to expand you holding period. In future posts, I’m going to show you actual trade confirmations for commodity trades that I held for upwards of 4 months.

As with the ES, the same can be said for Crude Oil. Why stay with this market short? Because when all the talking heads are saying $50 crude, and I’ve read Phil Tetlock’s Expert Political Judgement in which he states that the more well known a pundit is, the worse his/her calls are. I know that we’ll see crude settle in between $20 – $40. Then all the same pundits who missed the bearish call will tell you that $30 crude is here to stay. Of course Crude Oil will make in back to $90 in due time…right after enough of American drivers make the decision to get back into buying gas-guzzling SUVs again.

I have every reason to help you, even if you never become a student. The world needs great risk managers – potentially like you. The majority of the population has no clue about financial literacy, never mind the constitution to manage risk full time.

That’s where you can play a big role….by doing the things that everyone else can’t.

All you have to do is STOP.


Latest posts by Michael (see all)

Please note: I reserve the right to delete comments that are offensive or off-topic.