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Protective stop loss orders

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Protective stop loss orders

Post by fxvampiro on Mon Oct 20, 2008 1:00 pm

Welcome Everyone,

Yet another crazy week in the markets as the US government was trying to deicide on how to bail out the current financial mess. Until the bailout plan is fully disclosed I would expect some more unexpected crazy market gyrations. In light of that you need to be extra careful and get out the minute things don't look or feel right. cat

One thing I want to touch on briefly is the use of protective stops. First let me say that you should always use protective stops to help keep your losses under control but… Stops aren't always as safe as you think. Let me explain. Say you are going long the EUR/USD at 1.5025 and you decide that you are willing to risk 25 pips on the trade. This means you will place your protective sell stop at 1.5000 even. Under normal market circumstances if the trade starts to go against you and hits the 1.5000 level your stop loss order will be executed and you will be taken out of your position. affraid

Now here's an exception to the rule that can cause way bigger losses than the original 25 pips you intended to risk. Say a MAJOR news announcement comes out of nowhere that has a major impact on the markets. It may cause such a fast price movement of perhaps a 100 pips or more within a minute. In this case no one is going to get you out of your position at your price because the market is trading nowhere near it. drunken

If you look at the fine print of your brokerage account you will probably see some statement referring to stop losses during fast breaking markets. The fine print will look something like this: **Does not apply during major fundamental announcements . Many brokers will highlight the fact that ther offer guaranteed fills but as already mentioned there are acceptions to their policy. I bring this up because I don't want you to have a false sense of security when it comes to your protective stops. scratch

The fact is there isn't a lot you can do about this, but the good news is that these type of major market moving events don't happen that often. The only thing you can do to safeguard yourself is to make sure you don't over leverage the amount of positions you are trading in your account. Anyway, just some food for thought…

fxvampiro

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