2008 Jan 03 - Thu

Being Stopped Out, Accidently On Purpose

Putting stops on trades is a popular mechanism for protecteding 'the trade'. In some situations, if they are not placed properly, they can be used against the trader in their pursuit of profits.

According the exerpt below, which I gleaned from a thread on Elite Traders, putting stops just outside of common resistance and support lines can cause premature failure of what could have been a profitable trade.

I think the writer's comments are worth repeating as a possible explanation for why some traders may think that the market 'is out to get them'.

From my personal experience that is derived from day trading primarily NASDAQ through a proprietary firm, I suspect that the main running of stops by MMs and by large operators occurs when these professionals are able to move the market to a place where the majority of stops are most likely located. IMO such places are usually just beyond natural support or natural resistance levels, e.g. the high or the low of any of the last three trading days, or perhaps just beyond the boundaries of a congestion. Basically, if the market mover is able to take the market to a place where some stops are likely to be located, unless a significant amount of the outsiders/public joins in on the action and carry the price further, the market is likely to reverse shortly after reaching that point. For example if a MM or a large operator suspects that there are orders sitting just above yesterday.s high, then basically he knows that what he buys below yesterday.s high, he will be able to dispose of at a higher price because once he moves the market just beyond yesterday.s high a number of buy orders will enter the market. At this point, once the operator disposes of his original line he is very likely to sell short a significant amount of shares, and so unless there is enough buying from the outsiders to take care of this supply, the market is likely to reverse. This is just one scenario of many, however, I do think that the logic is peaty similar in most cases.

Many of the breakouts are real, such is the nature of market dynamics, however, when the market is in a consolidation or in a congestion it.s somewhat easy for the big operators to make their profits by running the market back and forth. Actually, if your stops are constantly being hit, it may be a sign that you are in a congestion. Personally, I try to stay out of the market as soon as I suspect that I am in a congestion, and wait for a good indication that the market is beginning to trend again.

To protect myself, I often do not trade the first breakout of the natural support or resistance, or the congestion. Personally, I.d rather wait for a correction or a second time through. Such strategy is much more conservative and will prevent you from taking many traders, however, IMO I think that being patient and waiting for a high-probability setup is essential if one is to achieve consistent success in day-trading.

This trader is still looking for the traditional retail style of trading of looking for the trends and runs. Rather than staying out of the conditions mentioned, I am still researching and developing some trading methods to stay with the market, bracket it, and make money through these congestive periods.

The other moral of the story is that a trader needs to be careful of where stops are placed. Stay out of the usual areas, and place them in the less travelled paths.