P1: PIC/b P2: VEV/d QC: e/f T1: g
c07 JWBK182-McDowell April 25, 2008 15:58 Printer: Yet to come
Stop-Loss Exit Rules 63Accepting the reality that the market will continually fluctuate, how
do you reduce the possibility that you might get stopped out of a perfectly
good trend by the normal ebb and flow of the market?
The answer lies in the current dynamics of the market as represented
by price, volume, and volatility. You will need to be sure that your system
and approach take these factors into consideration in a meaningful way so
as to allow your stops to breathe with the market. They need to protect you
from risk, yes, but at the same time they need to allow the market freedom
to fluctuate.USE CURRENT MARKET DYNAMICS TO
DETERMINE YOUR STOPOne closing note on stop-loss exits is to remind you that whatever strategy
you develop in choosing stop-loss exits, be sure that you do not use an
arbitrary dollar amount like, “I’ll get out of this trade when it goes against
me $200,” or “We’ll set our stop loss so that we don’t lose more than one or
two points on this trade.” To choose a random exit that does not include the
crucial information the market is giving you at any given time is ignoring
what the market is telling you. If you know how to listen to the market, it
will tell you where to set your stop.
Identify the correct stop loss exit based on market dynamics. Then
adjust your trade size to manage your dollar loss. Not the other way around.