Stop orders are a good thing. Understanding that will serve a trader well. They limit trading losses, and that’s great! The problem is…that seems to be the only thing ever said about stop loss orders and that isn’t great! The truth is, stop loss orders can fail and if you’re anything like me you may just have forgotten to plan for that.
Here’s a post that dives deeper into the problem of failed stop loss orders.
Alternatively, here is a post I wrote a few years ago of another possible perspective.
I recently found myself facing this very problem and after years of trading it suddenly occurred to me that I’ve never planned for this. As I thought back over my trading years, I was experiencing actual physical pain at how dumb I’d been. It was frustrating, something so simple had eluded me for years and cost me hundreds, if not thousands of dollars.
Stop loss Realization
Every time my stop loss order failed, the situation was the same. The position had moved massively against me and I was forced to make one of three choices. One, sell at the current price, two, hold on and hope for a rebound, or three, make an adjusting trade. None of which is easy after suffering a large loss. Thankfully, there is a process and it involves these four steps.
To execute a stop loss order most traders enter the order and leave it. That’s the standard method and it’s what we’re all taught. However, I suggest we use the tools at our disposal to combat this costly problem. I’ve developed in action plan to tackle this problem head on.
Failed Stop Loss Action Plan
Step 1: Identify the Damage
To do this, determine how much money is lost, how much time remains, and if the position can recover or be adjusted. Additionally, I should offer a warning; throwing good money after bad money isn’t usually helpful.
Step 2: Grip the Steering Wheel
Once we’re back in the drivers seat, trading decisions can be made with conviction. For my situation, I’m electing to hold the position a few days more. Currently, I have 25 days until expiration and the underlying is right at several levels of resistance. As a result, if price moves past the identified resistance level I’ll close the trade and accept whatever loss may result.
Now, please understand that I don’t believe this is the best possible play. It is my strong belief that the absolute best outcome would be achieved by closing the position immediately at the opening bell.
And, to do this effectively with minimal emotional disturbance, I suggest adding a make or break(MOB) level to the chart prior to the opening bell. A manual trailing stop loss of sorts. If the price trades through the MOB level, get out and don’t look back. Should price retrace, trail with the MOB line. If at any time this level is breached, get out.
Step 3: (OPTIONAL & NOT RECOMMENDED) Gun It or Buckle up
Notice, I didn’t say buckle up then gun it. There just isn’t time for safety here.
Admittedly, I don’t often suggest wildly risky trades but under these circumstances we may just be able to find an opportunity. To capitalize on this “potential opportunity” simply take a slightly more leveraged trade in the opposite direction, now the current market direction. Be prepared to enter and exit the position quickly. Don’t aim to recoup every dollar lost from the failed trade before it. At best, aim to get back to the original stop loss figure and exit. Essentially, this will keep whatever trading plan there was fully intact.
Finally, I hope the steps outlined above have helped someone. I believe if I’m able to do this effectively I can say good bye to failed stop loss orders and welcome home to a few of my dollars.
Let me know if you have any thoughts in the comments below.