The Pluses and Minuses of Wide Stops

If you've been reading this blog for the short time it has been up then you know that my trading is limited to mid to long term trades which don't require a lot of monitoring. This means that my trading systems use stops, both trailing and stop loss orders, and occasionally, limit orders. I've found that this type of trading really necessitates the use of wide stops. By wide stops I mean a larger stop than you would use if you were watching the market in real time. I generally place my orders before 7 a.m. or after 8 p.m. so there is not a lot of volatility when I'm looking at the charts. The use of wide stops allows the market to move back and forth without my constant watching. The danger, of course, is that when your stop is hit, you lose more than you would have if you'd used at tighter stop. I'm not saying that my way is for everyone, but I like to have a bit of room for my trade to move. Who has not felt the frustration of placing a trade which was moving in your direction, only to have it stop as soon as you hit the order button and go the other way. With a tight stop, such a common phenomenon would take you out (sometimes only to see the trade reverse it self and move in the direction you thought it would). The wide stop minimizes the whipsaw effect. I usually use a 2 ATR (14 day average) stop from my entry point. It takes a huge move in the wrong direction to hit the stop and leaves plenty of time for little moves against you to right themselves.

Now, the bad news. A few losing trades in a row can have a serious impact on your account. I've lost 300 pips in 3 or 4 trades before seeing a winner on more than one occasion. If your head can't take that, or if your account can't take it, then this style is not for you.

Good Trading!