When I started this trade diary my rules were as follows:
I shall:
3. Use Hard Stops only
4. Calculate VaR Daily
5. Use Stop limits for Offense and Stop orders for defense.
6. Scale into positions.
7. Keep a Dairy of all positions
8. Continue to refine rules.
Pursuant to Rule 8. I have changed several of my rules:
#3 Hard stops only. I have recently read David Dreman's book as well as several trading blogs by people I greatly respect. They have cautioned against hard stops with the advent of high frequency trading programs that are designed to search and destroy stops. I agree. I have witnessed several flash crashes and cannot continue to recommend hard stops.
I now believe that mental stops is the way to go. To ensure discipline, stops must be written out. The difficulty is whether to execute immediatly upon breach or to wait if there is a close below that price. I have seen mixed answers. And for me it will remain discretionary. In a highly liquid stock, a breach of the stop is more significant and should be sold immediatly. In a thinly traded position, it is more susceptible for a flash crash unless news driven (which would require an immediate sale). In Corn, for example, I witnessed a big and furious sell off in the etf although the physical commodity that it tracks remained constant. People that had hard stops got their pockets picked after the ETF recovered within 2 minutes.
As a corollary to this rule, I believe stops should be set at the level where the theory for the trade would be disproven. If the theory is a breakout and a breakout retreates in to consolidation the theory is disproven. If I buy an anticipation set up and the stock trades the wrong way out of the consolidation, the theory is disproven. No hopes, no justification, just get out.
I now believe that mental stops is the way to go. To ensure discipline, stops must be written out. The difficulty is whether to execute immediatly upon breach or to wait if there is a close below that price. I have seen mixed answers. And for me it will remain discretionary. In a highly liquid stock, a breach of the stop is more significant and should be sold immediatly. In a thinly traded position, it is more susceptible for a flash crash unless news driven (which would require an immediate sale). In Corn, for example, I witnessed a big and furious sell off in the etf although the physical commodity that it tracks remained constant. People that had hard stops got their pockets picked after the ETF recovered within 2 minutes.
As a corollary to this rule, I believe stops should be set at the level where the theory for the trade would be disproven. If the theory is a breakout and a breakout retreates in to consolidation the theory is disproven. If I buy an anticipation set up and the stock trades the wrong way out of the consolidation, the theory is disproven. No hopes, no justification, just get out.
#5 Use Stop limits for Offense and Stop orders for defense.
If a stock is worth getting in get in via market. If it is worth getting out get out via market. trying to get top dollar on a limit order can get expensive if it misses.
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