Trading stop losses

Daily Result: £375.67

Whoops! Not the best of results. And puts me into the red for July. But I'm not too bothered about it. Didn't really trade that well and I was due a loss. Think that's my second cricket loss in something like two months. Never nice to lose but keeping an eye on the bigger picture I'm more than happy if I can keep that kind of performance up.

I've had a few emails recently asking about stop losses. I'm not going to go through all the basics again here but my trading today covers some interesting issues around stops so I thought it might be worth quickly discussing some of them. Especially as I made mistakes as well as getting it right sometimes.

I made the loss on the Twenty20 game between Sussex and Essex. Started off ok with a small green either side but by the change of innings I was green Sussex and red Essex. I considered going all red in that spot but liked Sussex's prospects after they'd set a target of 164 to win. Essex can be good at chasing (they've chased 175 5 times and their top chase is 189) but due to delay following floodlight failure the entire Essex innings was going to be under the lights. It's an oft quoted fact that not a single team batting under the lights on Sky in last year's Pro40 cricket won the match. Conditions are just so tough. So I was confident of my position.

The market bobbled for a while at the start of the chase but eventually was moving comfortably my way and I was confident enough to go in on Sussex again at around 1.4. This wasn't a mistake in itself. What was though was that I overstaked. Especially in comparison to the existing state of my book. That's a separate issue however. What's of more importance here is soon after the market started moving against me.

Now the market going against me doesn't worry me. For most trades I'll have an exit point in mind if things go wrong and that was the case here. However, as with the other day, the volatility of the market caught me out again. The 2nd wicket partnership for Essex between Flower and Bopara started firing. The result was the price on Sussex shot out 30 ticks very quickly. I was left chasing the market trying to dump my back but couldn't get matched. Eventually the price settled momentarily. But at that point, at 1.7x, and with a required run rate of over 9, I thought it poor value to get out. I still fancied Sussex.

Before going on here's the first couple of points I want to make. In volatile markets it can be next to impossible to get out at a stop point. So be aware as you're approaching it. I've been caught out a couple of times recently. So secondly, if you're using some trading software it's well worth considering leaving the stop programmed so that it kicks in when you hit the point. You can always change your mind. But it will stop you getting in the pickle I did today. My ideal scenario would have been to get out at my stop and reasses. But I failed to place a stop. Because of this I missed out in the stampede when the market started to "correct" itself. I was left in a position of having to give away what I thought was great value to other backers to get out of my original back.

So what to do? Well, I made a quick decision. I was still well withing my max loss limit (£750 on a cricket match) and I still fancied Sussex. My previous back (the 1.4ish one) had effectively wiped my Sussex green and left it a red if I was to get out at this point. I fell back to an overall match position. Not something I'm that keen on doing. But in the circumstances fair enough. Certainly shows the value of leaving a stop in the system if possible as that would have avoided this situation.

My decision was I would keep the position rather than dump the back at what I considered the poor price. However, I had a new stop of 2.0. And I decided I'd offer this price if the market hit the mid 1.9x range to ensure I got matched. Not ideal. But it would keep me within my max loss and I'd just leave the match then until hopefully an obvious winner emerged and I could reduce my red. Really not the sort of position I like to be in. But I'd dug myself a hole and this was my on the spot plan to get out. If the market went my way I intended to hold exisiting positions but not add to them. Increasing their sizes could have got very messy and seen me sail through my max loss.

Unfortunately my new stop hit. So I bailed. Actually missed the 2.0 and ended up having to back Essex at odds on. Volatility is great when you're winning but can be a killer when you're losing! So at this stage I'm sizeable red either side and in wait and see if a clear winner emerges mode. I'm not getting involved again until that point. And when I do I'm simply hoping to reduce my red.

Well, what do you know? The next ball is a wicket! The prices flip back. And it turns out I got out at a stop point that was just about the worst price I could have. Didn't feel good at that point. But I know I'd done the right thing. I don't like losing. Don't like max losses. And without getting out then could have sailed through my max loss point very quickly. It was the right decision to bail no matter what happened after. That was a match stop point to prevent a big loss. For me it's a no brainer. Just get out and accept the loss.

As was bourne out by how the match unfolded. For a while both teams hovvered around 1.8 to 2.2 mark. Constantly fluctuating with a new favourite seemingly every over! Great for a trader with existing green who fancies a bit of a gamble. But leave alone territory for me with my large all red position. I'm not adding to it by gambling what way the market will swing on the next ball or two.

Anyway, Essex emerged the clear favourites. And by the time they needed 38 off the last 4 overs I was pleased I'd bailed at that match stop loss point. Didn't seem such a bad idea after all by this point. Getting out at the stop had saved me money.

The trouble was I at that point I didn't like the Essex price. It was too short. And I wasn't prepared to back it to reduce red at that price. So I left it. Which turned out to be just as well because they didn't make the chase, we had a big swing in prices and I ended up backing Sussex again a couple of overs later when it became pretty clear the game was theirs.

Wow. That's a long post. I guess the three key stop loss points I'll be taking away from it are be aware when approaching a stop loss point in volatile markets, leave a stop in the system where possible in volatile markets and just bail at a chosen stop point if it's to prevent a maximum loss. Today my timing on the latter looked like it couldn't have been worse. Sure it didn't feel good. But it would have felt a hell of a lot better than if I was still in with Essex big favourites and needing 38 off 4 overs. I allow myself a degree of flexibility on individual trade stops. But when it comes to big losses and max losses there is much less. If I'm approaching a max loss I'm out. That's a key rule in my trading. Ignore it and things can get very nasty. Much better to just take the loss at that point and live to fight another day.

Anyway, so that's a £375 red to leave me red for the month. Not quite as bad as it looks as I managed to pick up £100 green either side in the Roddick v Matthieu match from Wimbledon so will have that added to the account when the rain relents and the match finishes. Looking to do the 2nd ODI between England and the West Indies tomorrow too. Hope I manage to trade a little better than in today's Twenty20!