Tag Archives: stop loss

Last week’s webinar session featuring Currensee Trade Leader Taylor Growth delivered strong information on a “conservative” trading strategy and its pertinence to these current tempestuous market times. The concepts touched upon and insight provided could be quite useful to anyone involved in Forex, so I thought I would share some of what was revealed.

With a historical success rate in the high 90’s and currently up 1.5% this month, Taylor Growth seems to be doing something right. Tom Dawson, COO at Taylor Growth who spoke on the company’s behalf, attributes this success to a few key concepts: preparation is integral, you must consider multiple sources of influence like technology and the economy, and you need to have rules and systems you believe in.  Not long ago, the world of Forex was something new and uncharted – an environment he compared to the Wild West.

“There was a need for a conservative, careful, and productive company. One that was going to do a good job in producing real results that were accessible to people,” Dawson explained. He went on to say how it’s easy for someone with millions of dollars to achieve world-class results in Forex, but it’s a completely different story when you can only put 10K into the market, and that is why skilled traders are needed to help in attaining these results. Dawson finds solace in knowing that even though it may not seem it, there is in fact consistency in foreign exchange.

“One of the great things about Forex is that every month, companies all over the world have to move their money to do things like pay rent, etc. It’s the daily moving of this $4-5T that acts as a stabilizer bringing things back to equilibrium,” he explained.

By using range trading and understanding that over time, there will be various ebbs and flows in Forex, Dawson sees that no matter where a currency goes, it will usually always return back to its point of origin. This general paradigm of consistency is what inspired Taylor Growth’s goal of being able to achieve the highest risk adjusted return possible while producing smooth results – or, as Dawson put it, “taking the chop out”.

He explained how the use of Pattern Recognition when looking at what’s going on in the marketplace allows this consistency to actually be seen. It becomes apparent that there are repeatable, definitive patterns that occur, such as how the dollar is stronger and weaker at different times of the month. Taylor Growth has seen such a high success rate because they pay close attention to these patterns and base their decisions on them, which is something that’s hard for a computer to do.

Even with Taylor Growth’s scrupulous attention to macroeconomic detail, there will always be some degree of risk. Knowing this, he’s formulated a few ways he believes are the most secure for protecting investors from losses. Setting automated stops is not something Taylor Growth generally practices. Instead, when things start moving against them, they cut the trade themselves as a means of managing risk. By using a balanced combination of betting small, understanding which patterns are in confluence with them, and being comfortable with taking a loss when a trade moves within several hundred pips, Taylor Growth has achieved a historical success rate in the high 90’s. On larger trades, however, they do set hard stops to abstain from risking more than 1%.

One deterrent of automatic stop losses Dawson touched on was the way they can react to a Flash Crash.

“Problems can arise when a market is thinly traded at a particular time and if it moves up or down 200-300 pips, you run the risk of losing the trade because of the stop, even though you were correct. If the stop weren’t on, you would have eventually won the trade,” he explained.

The webinar was concluded with a Q&A session that touched on topics such as stop hunting, among others. Our next webinar will be taking place Wednesday, May 9th 2012, 12:00pm ET / 6:00pm CET where CEO Dave Lemont will reveal five secrets of investing in the growing Forex market - sign up here.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

A question came up during the webinar last week regarding stop hunting. One of the attendees was curious about it, no doubt having heard the term bandied about among retail traders. This gets brought up on a fairly regular basis, mostly by folks who saw their stop get hit in a market that quickly reverses back in the direction of their trade (see Stop-hunting is NOT the problem some people say). Let me try to clarify things.

A definition
First, let me explain what exactly stop hunting (running) means.

Basically, what we’re talking about here is one or more market participants attempting to manipulate prices such that the market reaches a level where preset orders are believed to reside in order to trigger those orders. Notice I didn’t specifically say “stop” orders there. They could be stops or limits. It doesn’t really matter. Those attempting to hunt those orders are just looking to get them triggered for their own purposes.

Why stop hunt?
So what are those purposes?

Imagine there are a bunch of buy orders residing at 100. What is likely to happen if the market hits 100 and triggers those orders? The market will probably go higher, right? If you know (or think) those orders are there and have the ability to push the market in that direction, can you see how you might want to trip those buy orders and then sell into the subsequent market move either to take profits on a long position or to sell at a better price?

This sort of thing has been going on for many, many years. Stories have come out of the futures trading pits (and probably from stock exchange floors too) for ages. It also happens in the inter-bank market where the primary pricing of forex rates is done.

Where retail forex is concerned, stop hunting is generally talked about more in terms of brokers manipulating prices. The fact that some retail brokers act as counter-party to their customers trades (market-making or dealing desk brokers) rather than acting as middle men (ECN or Straight Pass Through brokers) is seen as incentivizing said brokers to move prices against their customers to trigger their stop loss orders so the broker can profit from customer losses.

The reality
Back in the early days of retail forex there probably were unsavory brokers who manipulated prices to their advantage, and may still be in certain corners of the globe. Things have gotten much tighter in recent years, though, so if you stick with a reputable firm you’ll be free of that sort of abuse. In fact, as much as some like to bad-mouth the new regulations put in place in the US by the NFA and CFTC, part of what they have done is to put brokers under a spotlight to ensure these sorts of things don’t happen, and are punished if they do. In fact, one forex forum member put it to the test and found no evidence of stop hunting by retail forex brokers.

In other words, if you get stopped out on a price spike, it’s not your broker stop-hunting you. They get their prices from the inter-bank market, so if there was stop hunting being done it was almost certainly happening at that level.

Stop hunting will continue to go on in the markets, but it’s not something you should worry about. If you trade for any length of time you will inevitably fall victim to an adverse price move that takes you out of a trade only to see it reverse. There are any number of things that can make that happen. Where you are concerned, it’s either bad luck or bad stop location. A lot of those who claim they were stop-hunted just placed their stop too close to the market and either don’t realize it or don’t want to take the blame for poor decision-making.

 

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After a very successful webinar with Adantia LLC, we couldn’t wait to invite co-founder Brad Kuhlin to the Currensee office to find out more about their trading strategy. Brad let us in on a few secrets of Adantia’s stop loss strategy, an impressive three-stop system. The first video includes additional information on Adantia’s trading approach and their special stop loss strategy. In the coming weeks, we will add three additional videos to this post. Adantia trades under the ROCED.A ticker and has outstanding risk adjusted returns since becoming a Currensee Trade Leader.

Adantia LLC Interview Introduction from Team Currensee on Vimeo.


Predictions on volatility in 2012:

What forex strategies will prevail in 2012:

Comments on the Euro breaking up:

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

This is the third installment of our trader interview series.  Currensee Trade Leader JLFX Network (Ticker: JOLSU.G) uses a technical pullback strategy on overbought or oversold positions. His entry is based on Pivot Points, Moving Averages, Bollinger Bands, Relative Strength Index and Stochastic indicators. Exit is generally based on 3 to 20 pips of profit depending on market conditions and does not use lagging technical indicators. His stop loss is usually set at 2 to 5% total equity loss for all open positions as to prevent 'fix stop-loss hunting.' JFLX’s profit target for account JOLSU.G is a conservative strategy with 5 to 20 trades per month, an average growth of 2 to 4% per month and a total return of investment of 24 to 48% per annum.

Do you believe 2012 will be as volatile as the end of 2011?Currency Trader

The first quarter of 2012 will be as volatile as the fourth quarter of 2011 mostly due to the continuation of the Europe crisis and yen strength. The market will gradually stabilize when most of the global issues have been solved and rectified. Sometimes the best strategy is to not trade during high market volatility and uncertainty to avoid unnecessary losses.

What types of Forex strategies will continue to prevail in 2012?

Different traders will have there own strategy. A counter trend strategy, where a trader enters a position when the market has been extremely overbought or oversold based on technical indicators is my best strategy. Predicting an upward or downward trend is always difficult.

What would a breakup of the euro mean for your strategy?

It may be good for other currencies because the euro has too much weightage on the dollar. Movement of other major pairs will be more predictable and less aggressive without the euro.

 

Next week: Adantia LLC (Ticker: ROCED.A)

 

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

This is the second post on our trader interview series. Currensee Trade Leader TCM Spencer Beezley (Ticker: SPBJP.A) uses a simple, common sense approach that adheres to strict money management and uses proven trading techniques. He mainly trades the major pairs and always uses stop losses. Trades are usually closed long before the stop loss is triggered due to a dynamic time based exit that reduces overall exposure to the markets. TCM Spencer Beezley uses a breakout and scalping strategy as the two main strategies traded on this account. He opens up to five positions at a time and always maintains a low amount of leverage per position.

Do you believe 2012 will be as volatile as the end of 2011 has been?

I believe volatility will continue to be high due to the many unresolved issues that much of the world is still facing or has yet to face.  When we see news and rumor affecting currency pairs to the degree we've seen in much of 2011, you have to consider how much is still yet to come in the attempt for resolve in these issues. With weak fiscal policy or short term fixes that 'kicks the can further down the road', the market thrives off any relevant news resulting in higher volatility.

What types of Forex strategies will continue to prevail in 2012?

The types of Forex strategies I believe will always have a chance of prevailing are ones that can be stable in a multitude of market conditions, use a tight stop loss, and do not rely on high degrees of leverage to be successful.  It is also important to have a diverse mix of strategies to help smooth out the equity curve when one or more of the strategies is experience periods of slight drawdown.  I prefer also to hold trades short-term to reduce overall market exposure and being liquid by the end of the week.

What would a breakup of the euro mean for your strategy?

In my strategy, the EURUSD is the currency pair that I trade the most.  I am always working in the background to identify new trading strategies that trade different currency pairs.  As a Forex trader, it is always important to be prepared for shifts in the market and to be able to accommodate for those shifts as seamlessly as possible.

Next week: JLFX Network  (Ticker: JOLSU.G)

 

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

The topic of stops and their placement is a regular theme of discussions among traders and investors. It is pounded into the heads of everyone coming into the markets that you must have a stop to protect against a large loss. This comes mainly from the idea that if you don't have a stop order in place you will be inclined to let losses run, which is something which happens far too often. This is a big enough problem with market participants that academics have given it a name – the Distribution Effect, which is the tendency to cut winners and let losers run.

Should you even use stops?
Before I address the strategy for stop placement, let me first tackle whether you should use them. Some will argue that you should have mental stops rather than standing orders to avoid any funny business from the markets (stop running, flash crash, etc.). I tend not to go for that, but what I'm really talking about here is whether you employ stops at all. Some strategies actually see degraded performance when stops are employed. As a result, it's always worth testing a system with and without them to see their impact.

Now, on to where to place your stops should you decide using them makes sense.

The case against fixed stops
First of all, realize that any strategy which employs fixed distance stops – either in terms of pips or % of current prices – runs the risk of not reflecting current market conditions and suffering for it. If, for example, you have a 50 pip stop but the "normal" volatility for the period in which you are operating is 100 pips, you're almost certain to be stopped out on what's a relatively insignificant move within the market's current context. This is something that burns traders quite frequently.

Some traders employ volatility based stops to account for this. Using a multiple of the Average True Range (ATR) is a common strategy. The one caution is that ATR, or any other reading of that sort, is going to necessarily be historical. It may not account for expected future volatility that could be anticipated during the span of you holding your position, such as from news or data releases. You'd want to factor that sort of thing into your stop.

Where do you no longer like the trade?
In my own trading I actually don't even think in terms of stops. I think in terms of negative exit strategy. By that I mean determining what market action would tell me that the trade I'm in is likely no longer going to perform the way I'd been expecting. This applies to both initial trade strategy and to on-going management (think trailing stops).

In other words, I don't think in terms of "I don't want to lose more than…" That comes later, in the position sizing decision. As a result, my stop is merely the order that takes me out of a position I no longer want to be in, just as a limit order takes me out of a winning position I no longer want to hold.

So where does that exit point come from?

It's based on my underlying reason for the trade. If I think the market is going to turn down when it approaches key resistance and I put on a short, if the market instead goes through that resistance then clearly the market isn't acting as expected, so I want out. If I get in on a long trade because I think a new uptrend is developing and the market starts trading negatively, then something isn't right and I want out.

It's also worth noting that a negative exit strategy isn't always about the market going against you. It can also be about closing a trade that just isn't going for you the way you thought it should when you got in. This is why I tend to steer clear of thinking just in terms of stops. They only reflect one side of the equation.

The right approach for you

The bottom line is that you need to take a look at the type of position entry strategy you are employing and develop a complimentary strategy for getting out of those positions. This goes not just for losing trades, but for winning ones as well. This will be different for trend following approaches than for ranging or mean reversion ones, and if you have a fundamental aspect to your trading or investing that will have to be incorporated as well.

 

This week is an abbreviated trading week as the North America holidays curtail forex volatility at the outset of the week. When the markets do get back into swing the top focus looks to still be on Greece and if they are willing to accept the fiscal measures that will appease the markets. Greece is in no position to bargain so I would expect that we’ll see Greece saying all the right things this week. Those headlines will be scrolling on the ‘Feeds’ section on Currensee.

The immediate reaction in the markets I’d expect will be one of relief. Relief that Greece, for now, is still using the Euro as its currency of choice and not a weakened Drachma. In this situation the Euro should gain. It might be about time as well as it was just 2 months ago that Euro was trading above 1.50 versus the US Dollar.

I could be wrong though. Greece may say something this week that surprises us all. If that is the case and the markets are back at full strength then there will certainly be a reaction. Will we see a move to 1.35, 1.33 or even sub 1.30? It could happen as the markets will be looking past Greece and worrying about the other European (PIIGS) countries with the same problems who have been in the passenger seat up until this point.

These headlines will be scrolling down the ‘Feeds’ section on Currensee but what if you are away from the trading desk? You may be in Australia sleeping, or in Belgium working or in the ‘States out buying a coffee. All could happen. If you are Long Euro’s on the expectation that Greece will say the right thing but they surprise the markets then watch out. Are you protected? Well you should be.

I bring this up because the last time a nation withdrew from the Euro zone currency the markets witnessed a phenomenal move. Of course I’m referring to 1992 and the UK’s withdraw from the ERM. The British Pound went from above 2.00 to less than 1.55 to the US Dollar in a short time. You might suggest that times have changed and this could never happen again, well think again and remind yourself what occurred in 2008.

We’d all have loved to be on the right side of those trades and maybe you were in 2008. George Soros was in 1992 and became a financial sensation ‘overnight’. Successful traders usually have targeted areas that they expect to take profit and utilize stop-loss levels when their expectations prove to be wrong. The last thing that you want to have happen is to have one bad trade wipe your account out or ruin a string of profitable trades. Utilize a stop-loss to protect yourself.

Where you place that stop is a whole different story. One mistake that I made last month was moving my stop-loss around. For example I placed a slew of Yen trades on and nearly all the trades started out in the direction that I expected. I became comfortable and ignored the zig-zag of the market and moved my stop-loss essentially right on top of my entry price. Fast forward 8 hours later and the price level was where I expected the Yen to be but I was stopped out of most of my trades. Lesson, use a stop-loss but put it far enough away so your trade won’t be derailed but you will be protected if the markets go against your expectations so that you can live to trade another day.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.