Lessons from the Pros


Stop Less?

There was a major decision made by the major stock exchanges without much fanfare or even consultation. If you aren’t aware yet, on February 26, 2016, the New York Stock Exchange, NASDAQ and B.A.T.S. exchanges will no longer allow stop market or Good Til Cancelled orders.  This means that you will not be allowed to place protective stops on your stock positions when trading.

Why would the exchanges do something like this?  Stop orders are used primarily by retail investors as a method to protect themselves against adverse price movements causing catastrophic loss in a position.  The professional institutional traders rarely use them anyway.  A report from the NYSE stated that only a scant 0.22% of orders on the exchange were stop orders.

Free Trading WorkshopThe trading institutions claim that they are trying to protect investors from wild price swings that were experienced during the flash crash in 2010 and more recently on August 24th of this year.  They claim that the investors who used stops were taken out of positions only to see prices recover shortly after.  They state that without the stop, the investor would not have realized any loss and would still be in their positions today.

The problem is not with the investors placing stops, the problem is with them placing stops in the wrong place.  When utilizing proper price analysis on a chart with supply and demand you should not be stopped out unless there is a major change in the trend, and then you would want to be out of the position anyway.

The investors and traders who used stops in 2008 were thankful.  The investors who believed their brokers when they were told to “hang on,” rode a painful slide and missed out on several years of positive returns until the markets recovered.  Stops have been around almost as long as the markets have been.  Nicolas Darvas wrote a book in the 1960’s called, “How I made $2,000,000 in the Stock Market.  In the book he highlights the extensive use of stop losses.

The only reason for the cessation of stop loss orders by the exchanges is so that the institutions can benefit from additional price manipulation.  There is no way that a mere 0.22% of order flow can be blamed for wild price swings.

So what are traders to do after February? Well, active traders can still place stop and GTC orders in the Futures and Forex markets and are less likely to succumb to price manipulation.  The alternative is to utilize a broker that will house “stop orders” on their servers or use activation rules on your orders.

Advanced trading platforms like TradeStation have a solution to this already in place.  When using the Order Bar feature on the trading software, you will notice an “Advanced” button.  Once that is selected, there is another menu that allows the trader to place more conditions on orders to be routed to the exchange.

How to protect yourself in a trade without placing a stop loss

When setting the activation rule, the trader can even change the trigger type so that they are not accidentally activated early from late prints.  The only drawback to the use of these tools is that you must leave your computer on and the program running for the orders to trigger.  This may be one of the only solutions to another roadblock being placed in front of the individual trader’s road to success by the institutions.

If you are not aware of these roadblocks, you need to become educated. Visit your local Online Trading Academy office to learn more today!

Brandon Wendell – bwendell@tradingacademy.com

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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