Posts Tagged ‘day trading’

Guide to stop losses

Wednesday, February 23rd, 2011

Every forex trader likes to think he is able to think swiftly on his feet and respond to any which way the market turns. However the truth is that when caught with an unexpected market movement, the initial gut instinct is not always the right one. In a world where one bad decision can mean the end of a trader, it is essential to have a strategy for when the deals don’t go as planned. And have no doubts, this will happen. Frequently.

Stop losses are one way of protecting the capital in the account to ensure there is always enough left to continue trading. It is essentially just another name for a risk management system where the trader pre-determines exit levels which when hit mean the deal is closed, regardless of the dealer`s position.

trading stop losses

Some dealer’s dislike the concept of stop losses as they feel they are a reflection on a dealer’s ability to judge when to exit the market and restrict trading. However, when the market is moving against a deal, it can be very tempting to pursue a position, in the vain hope that the odds will eventually turn. However, by the time they do, all of the capital funds may have been obliterated meaning the trader is unable to continue.

Stop loss level

Every trader will decide at what point they will set up their stop losses but the recommended value is around 1-2% below the support level. There is little point setting stop losses just below the support level as it is expected that this level would be tested with minor break throughs, before rising back above the level again. Setting the stop loss level too low could result in deals being closed too early, when support levels are merely being tested by the market and not actually broken.

Trailing stops

Trailing stop losses are possibly one of the loosest types of orders to place, with no set numerical value specified. Trailing losses follow the market with the stop loss stepping in when the market dips below a certain percentage, but allows for fluctuations.

Slippage

However, when stop loss orders are executed, the price is not usually exact. A broker may not be able to exit the market until the next available price, meaning there may be a slight difference in the actual close and the stop loss order. This difference is called slippage. There is a way to prevent this and this is by using a guaranteed stop loss order. This means any deal will be closed at the exact price the stop loss order specifies but usually command an additional fee from the broker.

Time based stop loss

An alternative approach is time-based stop losses. This type of trading very much relies on the good judgement of the trader and perhaps is not the easiest approach for beginners. A trader decides beforehand on the exact amount of time he will stay in the deal for and exits at exactly that time, regardless of how the deal is going. The skill lies in finding the right trade to enter sat the right time so that the market goes in the right direction to make the gains.

Regardless of how many traders feel about using stop losses, they are an essential part of forex and will help protect capital from being wiped out.

David Borman interview

Thursday, November 11th, 2010

david borman authorDavid Borman, author of forthcoming book ‘The Everything Guide to Day Trading’ is interviewed by www.tradingdiary.co.uk.

1. Who are you?

I own and manage a company called Chicago Quant Research. I’ve had the opportunity to perform statistical analysis and writing for academic research and financial end users. My current project is to put together a bid for a client who wants data mining done for a trading system he has developed in Ninja Trader. I’ve also written over 100,000 words this year alone on various writing projects including financial and historical research. In the past I’ve held positions in Private Client Wealth Management, Private Client Tax, and the Off Shore Hedge Fund Business. I also Day Trade FX and ETFs for my own account.

2. What is your new book about?

“The Everything Guide to Day Trading” is about getting up to speed to open your first trading account(s) and begin the process of Day Trading as a business. Day Trading as a business is much different than how most people Day Trade. Most people say they Day Trade for profit, but in reality they trade for pleasure. Let’s face it: it’s quite thrilling to Day Trade, but difficult to profit from it (or even make a living at it!). My book is designed to help you anticipate and prepare for trade set-ups. There is also a healthy amount of risk management as well as trading psychology in the book, all with intentions of getting the reader to the point where he is having weekly and monthly average trading gains in his account.

3. There are a lot of day trading book out there. Why did you decide to write one? And why should I buy yours?

the everything guide to day trading david bormanMost of the Day Trading books out there are very technical in nature. Whether they teach Technical Analysis or Fundamentals, the books can be quite daunting to read for the beginner. Also, I’ve noticed that not many of the books speak about what it “feels like” to win and lose at day trading. Believe it or not, that is something that must be experienced firsthand to truly begin the journey of being a Day Trader and Day Trading for a living. That’s where my book is different. Not only have I been witness to hedge funds winning and losing in the market, but I’ve personally had my ups and downs. The book not only includes a healthy dose of technical and fundamentals instruction, it helps the reader with getting to know her thoughts and feelings when she’s have a bad trading day, how she might feel after a huge day in the markets, and the psychology (thrills?) of taking on un-hedged risk: this is why my book, “The Everything Guide to Day Trading” is different.

4. What experience do you have of day trading?

I’ve traded and day traded everything from Mutual Funds, ETFs, Gold, Equities, and FX. I’ve worked in the back office of an off-shore hedge fund administration company that had over 50 Billion USD under management, so I’ve seen every product, market, and hedging style imaginable from the inside. My first trade was buying gold bullion back when it was 510 USD an ounce. Right now I’m focused on the commodity currencies as well as a healthy respect for what is happening to the Swiss Franc.

5. What is your trading style?

I mainly like to focus on overnight holding periods with stops. This way I can wait until the Asian markets open, evaluate, and look for set-ups. Stops are pretty tight, as I’ve learned the hard way that things can happen pretty quickly when you’re not looking. Another thing, I don’t always have money in the market. I might sit on cash for days on end while I look for something interesting to happen. In that respect I am somewhat an opportunist. If the market doesn’t interest me, has no clear direction, or if there is just too much risk I allow myself the ability to walk away and do nothing.

6. Can you give us some quick day trading tips?

Ha! You’ll have to buy the book! Just kidding. Actually, the best advice I can give to anyone who is thinking of getting into Day Trading for a living is that first and foremost your cash is what you want. Don’t get into the situation of being away from your cash for too long. In other words, don’t be in a trade for too long. When looking at trade set ups plan on when you will be getting out of the trade and back into cash AS SOON AS POSSIBLE! Your cash pays the bills, and you can’t pay the bills with a position in an ETF, FX or commodity!

7. Do you worry that you might encourage people to trade away money they can’t afford to lose?

Not really. If done right, and with the proper risk management techniques, losses can be minimized, especially if you master the emotions related to Day Trading. You do need a healthy dose of respect for the markets though. Also, if you think of Day Trading like a business, and each one of your trades as a project to undertake, to “bid on” if you will, your trading business will naturally stay away from the trades that do not have a reasonable expectancy of making a profit.

8. What other finance related books do you like/recommend?

Well to tell you the truth, I’ve read just about every book I could on finance. I’ve read books on M&A accounting, taxation, trading, and financial modelling. The most influential books I’ve read have been Niall Ferguson’s “The House of Rothschild” and the textbook from a class I was taking at Northwestern University on banking and markets. Both gave me the background to look at trading as a business for profit. They also gave me glimpses of how if you treat your financial endeavors as a form of a “financial intermediary” and all of the risks associated with asset transformation, etc., then you will be on the right track to keeping your Day Trading business alive in good times and bad.

Feel free to email David at Chicago.Quant.Research (at) gmail.com or look him up on the web at www.Chicago-Quant-Research.com.

The Everything Guide to Day Trading will be released during January 2011.