When short term trading I try to avoid hard stops but sometimes they are necessary. Today, for me, was one of those days. So I thought it would be a good time to discuss how I use hard stops – when I must use them.

For those that do not know already a hard stop is a firm order to exit a market if a specified price is hit. It provides protection when you cannot be there to watch the market in person. Like today, I had a midday appointment and it was necessary to leave at a time when I had an open order – in the 10 year US Bond market. At the time price was exactly at my breakeven point so I could have exited the trade with no loss, except for commissions. However, I though the market would probably move in my direction (I was short) so I did not want to surrender my position. Here’s what I did and why.

I placed two orders, OCO (one cancels other), with a stop market at my desired stop value – in this case a price of 127’08.0 – linked to an exit limit order at my target price of 126’31.5. This OCO setup effectively limited my loss to 5 ticks and my profit to 12 ticks.

There were three possible scenarios that could have played out here:

1. I could have been stopped out if price hit a high of 127’08.0.

2. I could have exited with a profit of 12 ticks if price hit a low of 126’31.5.

3. I could remain in the trade if price never hit the upper or lower of the range established by 1 and 2 above.

Well fate dealt me the number three on this one. Price was fickle and when I returned several hours later I was still in the trade – and eventually exited with a minimal profit of a single tick.

Now that is how you can keep a trade active when you are not there to watch it – even over night. As an aside, if I had been here to monitor this trade I would have taken a profit of about 6 ticks – much better than my meager 1 tick actual profit. The reason is that I was a bit greedy in selecting my exit price and went beyond a primary SRV at 127’03.5 in setting my exit order. Not long ago I posted a commentary on controlling fear and greed – I guess I need to go back and read it again!

It is not necessary to place both an exit and a stop at the same time – you can easily just place the stop and be protected from excessive loss – but since I hate holding over night – and knew I would be gone most of the afternoon – I wanted to get my profit if my target was reached when I was no there.

Oh well, tomorrow is another day, Scarlett.

 

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