Avoiding Disaster

[GCB 10]

This is a post I posted in a trader's log. I'm reproducing it here (with some improvements) to start a thread about discussing potential disasterous pitfalls and how to avoid them. I'd be interested in anyone's insights.

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One of the biggest reasons I put it hard stops and targets is because you never know when your computer or Internet is going to go down. This happened to me just the other day. I had been having problems with the Internet slowing to a crawl so that TradeStation was affected.

 

I was short soybeans when the Internet quit on me. Fortunately I had my bracket orders in, so I wasn't too worried. I was getting enough information to know the trade was working out but I was getting no updates on whether my targets had fired. The screen was showing them still live, even though price had moved below them. I called the TS desk and the guy there told me indeed my targets had been hit and I was out of the trade.

 

Now here's the nightmare scenario. :nahh:

 

On a bright Friday morning, with hope in your heart and profits on your mind, a buy signal fires and you go long 5 YM contract at 13000. You enter no hard stop, however. Rather you decide to use 10 point "mental stop." Your target is 13020. If the trade works out you will gross $500, with a risk of only $250, a nifty 2-1 risk reward ratio. That's a somewhat bold, but not too risky 1% risk on your $25,000 futures account.

 

You settle into your chair to watch the trade. It moves your way a bit, inching up to 13010, but then turns around, dives past your entry and hits your mental stop loss at 12990. You hesitate, hoping it will turn back up, but it drops another 5 points, an additional net loss of $125. Now you are getting scared. You reach for your mouse to close out the trade, but you screw up the order and accidently buy 5 more contracts, and are now long 10 contracts. YM drops another 5 points. Now it is down 20 points from your entry, and you are down $625 on the trade. You scramble to close out the trade but your heart is now pounding and your adrenaline is pumping. You fumble to change the number of contracts to 10, but your sweating palms make it difficult. YM drops another 10 points and you are down $1125.

 

 

Finally you move the mouse to the sell button. But the mouse pointer won't move. Your computer has frozen! Panic-stricken, you reach for the reboot button. While your computer is booting you turn on CNBC. The Dow is down even more. You figure down 40 points since you entered the trade. You now losing $500 dollars for every 10 point drop, so now you are down $1625.

 

 

Your computer finally reboots and you re-open your trading platform. Your trembling hands type in your username and password and click Logon. Nothing happens. "Cannot find server," your platform informs you. You open up a web brower, but it cannot find your home page. The Internet is down! You glance at the television. The Dow is down another 20 points and you are in the tank for $2625, over 10% of your account.

 

You decide to call your broker to close out the trade. Where's your cell phone? That's right, you left it in your bedroom. In full-panic mode you rush upstairs, but not before checking the news. Dow down another 10. You're loss is at $3125 and dropping. Upstairs you grab your cell phone and open it. Nothing happens. The battery is dead. You let out a blood-curdling cry and bolt downstairs for the land line.

 

 

 

When you get there you reach for the phone receiver so hard you knock it across the kitchen, breaking it. Fortunately, your phone base has a speaker phone. You press the button and gasp with relief when you hear a dial tone. But you can't recall the broker number. When you wanted to call them before you just looked up the number on the Internet. But it's down. Just then your dog trots into the kitchen, sits down and regards you with a strange expression. You turn away from him in embarrassment.

 

 

After some calls to long distance information finally you get the broker number. But since it is the general number it takes more time to get ahold of the trading desk. Then you have to use your social security number for them to find your account because you can't remember your futures account number. In the meantime, the Dow drops another 35 points.

 

Finally, you get the broker to close out your trade. He sells your YM contracts at 12895, 105 points from your entry. On one trade you've lost $4875, 20 times your planned risk and 20% of your trading account.

 

 

All because you didn't enter a hard stop. (And were unprepared for disaster in just about every other way.)

 

 

Can't happen? I'll bet something like this happens just about every day to somebody out there.

 

When electronic trading always enter a hard stop and, better yet, always send a stop OSO order along with your trade order to guarantee if your trade is executed your stop will be in place.

 

For that matter alway have a fully-charged cell phone with your brokers trading desk on the speed dial. Keep your account number written down and handy.

 

Gary

[ItalianSharp 10]

Although your story was a bit dramatic, it definitely can happen to anyone who is unprepared.

 

These are the "little" things that can make a huge difference when everything seems to go the wrong way.

[dalby 10]

absolutely, anybody who trades futures with a "mental stop" deserves to lose ALL their money.

 

im pretty convinced some of the best moves are forced liquidations by traders having exactly that happen to them - brokers closing their accounts

[Guest cooter]

This past week was a good example of forced liquidation all the way down.

[GCB 10]

This past week was a good example of forced liquidation all the way down.

 

Interesting. That does explain a lot. This was what happened during the '29 crash, too, back when 10% margin on stock accounts was the norm.

[Warren Forex 10]

The secret to making profits is to protect your capital to live to fight another day. I trade FX and I use stops in a unique way since I time my entry and then in most cases my stops have already locked in a profit. I used to trade currencies via futures and I always entered my STOP right after getting my position filled. Also NEVER lower your STOP once you put it on. If you are wrong take your loss and try another trading plan.

 

Plan your trades and "Trade Your Plan"

 

Your points are very valid. Murphy's Law does still apply.

[Guest cooter]

I used to trade currencies via futures and I always entered my STOP right after getting my position filled. .

 

After? In other words, it's a bracket order?

 

There's an internet guru/broker who says that traders should always place their stops first BEFORE placing their order.

 

What do you think of that method of applying stops?

[GCB 10]

After? In other words, it's a bracket order?

 

There's an internet guru/broker who says that traders should always place their stops first BEFORE placing their order.

 

What do you think of that method of applying stops?

 

OSO bracket orders are almost always the way to go. But the method you describe seems next best. Strictly speaking, however, you could still get caught short. Before you enter your matching order your computer could lock. The market could then reverse, hit your stop, then reverse again, and the nightmare scenario is still possible, however less likely.

[Warren Forex 10]

I place my stops after I have my position or positions. Sometimes my stop is placed as it drops if shorting so I lock in profits. Explanation is that I time my entry to coincide with top of bollinger band and change in SAR direction.

That is why I do not know my STOP position when I enter the trade. I hope this explains it for you.

 

Good Trading

[Guest cooter]

Why not use a trailing stop instead?

[Warren Forex 10]

I rarely use trailing stops since I am very hands on. I was shorting in the last few minutes and based on News out that the fixing in Japan pushed the rate up for USD/JPY I shorted up to 1.1857 and I have already closed positions on the move below 1.1849

 

I get many PIPS this way. Trailing Stops usually need about 15 or so.

 

I am always open to ideas and or suggestions.

[Warren Forex 10]

I just closed ALL Positions for nice profits on the quick move down to 1.1835

 

I recently had a PFG Demo Account opened with 5,000,000 US Dollars on July 17, 2007. My balance as of now with ALL Positions closed is $8,402,478.68 US

 

To bad it was not real funds. I am awaiting a deposit of One Million in real funds and that is why I had the Five Million Demo Account set up. I find it easier to trade Five Million than $50,000 US Dollars which I trade regularly for clients.

[Guest cooter]

 

I recently had a PFG Demo Account opened with 5,000,000 US Dollars on July 17, 2007. My balance as of now with ALL Positions closed is $8,402,478.68 US

 

It's never the same, especially in the wild wild west of FOREX with real money.

 

What do you reckon is the minimum or optimal amount of funds that a trader should use to start up a FOREX account?

 

And does it make any sense to trade "mini" or "micro" lots instead of regular, full lot sizes in FOREX?

[Warren Forex 10]

Personally I would not trade with less than $10,000 US Dollars. I always have traded standard lots.

 

It always for me has been good trading at least $50,000 US Dollars in clients funds.

 

If you trade with $10,000 US Dollars then NEVER trade more than 20% of the capital. That then is 2 positions of 100K for 200K in open Positions.

 

Use a Stop Loss of 20 PIPS so your MAXIMUM loss would be $400 US Dollars or 4% of your capital.

 

That is at 100-1 leverage.

 

I trade at PFG now. If your winning percentage of trades is over 60% you can do good.

 

My average is always over 80% because of my trading style.

 

I hope this helps.

[Warren Forex 10]

Here is a good example of why knowing what is happening fundamentally can make you profits. Within the last hour the USD/JPY took a quick run up 50 PIPS to 1.1900

 

I shorted it up after 1.1880 in blocks. I read that it was Russian buying of EUR/JPY sending the USD/JPY up. When the buying stopped it came back about 20 PIPS and I closed ALL my positions for a nice quick profit.

 

Being up for London trading ALSO HELPS.

 

 

Have a great Trading day !

[dalby 10]

i no longer trade Forex per se, but i did take a position in FXE quite some time ago in one of the accounts i manage (basically a dollar hedge).

 

this is a great lowleverage way to take advantage of forex fwiw. it's a EURUSD etf, basically.

 

now, i WISH i had 10 lots since i caught the equivalent of about 800 pips but...

 

it's a consideration for taking a position play for those who want currency exposure, or to hedge against currency exposure

[The Bear 10]

OSO bracket orders are almost always the way to go. But the method you describe seems next best. Strictly speaking, however, you could still get caught short. Before you enter your matching order your computer could lock. The market could then reverse, hit your stop, then reverse again, and the nightmare scenario is still possible, however less likely.

 

True that GCB, that happened to me before. I tried to enter the stop before my entry, but the stop got hit somehow, then I got in panic mode when i'm stuck in an unexpected position. I've been in un-wanted positions maybe 3-5 times, and lost only $490.00 (oil) at the most...it could have been way worse, I sent a limit order by accident. The worst thing to do is to panic, even though it's probably humanly possible to not. I immediately needed to find out if it was long or short. Once I had the info, I didn't even look at my charts and I hit the market order....I didn't care if I could get price improvement or not...I just wanted out. It was very nerve racking.

 

Another time same scenario I made a $160.00 gain by fluke from just hitting that market order button again to immediately get out, not even looking at the charts.

 

The thing I hate is this feeling I get in my stomach and my heart races. It's a horrible situation.

 

I couldn't imagine trading without hard stops.