Stop placement is where we separate the kids from the adults. Stop placement is the sole responsibility of you as the manager of your trading business. It is one buck that you cannot pass. You are the end of the line when it comes to placing stops. Let me show you why you, and only you, can decide where to place the stop. There are several considerations:
The size of your margin account has the greatest effect on stop placement. When you look at a trade and see where the stop should go, or where you would like it to go, you then have to look at the size of your margin account and determine whether or not you can even consider the trade.
Your comfort level. Although you may have sufficient margin to place the stop where you would like to, and although the stop is logical for the trade, you may not feel comfortable with the stop being so far away (or even so close), and so you will decide not to take the trade with the stop far away, or move the stop back if it appears too close.
Volatility. You must take into account market volatility when placing your protective stop. If a market that normally ticks two ticks at a time suddenly begins to tickfive ticks ata time, you must certainly take the level of volatility into consideration.
You may find out that you have to place your stop too far away for the size of your bank or your comfort level.
When you use mental stops, there are two other considerations which you must ponder when placing your protective stop. They are: Your speed in placing the order, and the speed at which your broker can place the order. Let's look at each.
The speed at which you can place the order. This depends upon how fast you think on your feet. There are three factors here: Perception, decision, and action. How long does it take you to perceive that NOW is the time to pick up the phone and place your stop in the market?
Or, NOW is the time to enter your stop via your electronic trading platform?
Then, once you make the perception, how long does it take you to decide to do something about what you have perceived? Are you quick to decide upon your perceptions? Finally, are you quick to act once you have made a decision?
Some of us are very quick in all three areas. Some of us are too slow to utilize mental stops. Only you can tell from the experiences you are having in the market whether or not you are quick enough to use mental stops.
