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When Trading Futures « Never Move Your Stop

|Includes: iShares Russell 2000 ETF (IWM), SPY

When Trading Futures « Never Move Your Stop

We speak about a few factors all the time when discussing trading futures. One major factor that comes into just about every scenario is that of emotions. Specifically I want to tackle emotions as they affect stop placement.

One factor or occurrence that may occur during the day as we are trading futures is the movement of stops. This action alone in itself is driven by some sort of emotion or cue. Here is a scenario that comes to mind and how I strive to approach or handle it.

Futures Trading Scenario Breakdown

My trading day is going pretty good as of now. We're in the middle of my own morning session guidelines. I'm up a solid 15 ticks in realized profits and I'm ready to enter another trade to the long side that is setting up. I place the trade and everything seems to be going as planned. I've got my stop at my usual 8 ticks and my profit target out of sight as I always let the market take me out.

Quickly, price jumps up and floats between 6-8 ticks positive and in my favor. I know that the trade is still fairly early in its development, but price simply seems like it wants to head higher without much pause. It feels like I'm just where I want to be and all actual signs are agreeing with me.

I go ahead and reason with myself and come to the decision that I'm going to tick up (eliminate risk) on this trade. I might as well do this as I'm up and it's still early in the day. I've just moved my stop up 3 ticks to soften the blow knowing that every trade has the opportunity to be wrong. Each trade entry I take has a fair shake at either being correct or incorrect.

At this point I've got my stop at 5 ticks and price decides it wants to take a quick dip down to my trade entry. It almost feels as if it happened in a second and it may have! A typical first thought may be that I've eliminated risk on my futures trade too quickly thus I should just move it back down to give it a little more space.

How I Handle Trading Futures « Rethinking My Stop Placement and Movement

I know already the probable outcome of this decision. This outcome being that if price decides it wants to head down to 5 then there's a strong chance that it may want eight. If we think about what price just did we know that it showed a signs of baiting action though it's not entirely clear as of yet.

If I move my stop back down I've positioned myself to be "worse off" then I was before instead of "better off". I've just given up 3 more ticks which depending on the instrument traded will equal a possible 4 ticks after slippage. The question that I pose to you is what characteristic does a small 3 tick range tugs so hard that it makes sense to give up 4 more ticks?

Once you've ticked up (eliminated risk) you've placed yourself in a better position in your overall goal. You've bettered yourself in your goal to preserve today or even prevent the day from getting too out of hand to recover. You have trade opportunities that will arise later in the afternoon session and if not, tomorrow without a doubt.

I don't feel in my trading that there is any need to move a stop back down once it's been moved. I look at it in the frame of mind that my next trade will only have to accomplish very little. It must trade in my favor the same or better than 5 ticks for me to break even and call it a day(or continue). If the next e-mini trade ends up swinging against me then I'm still about a tick or two up. That should at least cover most of the commissions as to erase the day completely. I prefer this much more than working in the opposite direction. My goal should be to work (maneuver) a trade up and not down and that's why I never move my stop.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.