I hear the same story over and over …
“I was making money, slowly and gradually increasing my trading account, and then I lost all my winnings on one or two trades.”
Ever heard that?
Ever done that?
There are ways to protect yourself from this common trading problem. Some are simple disciplinary issues, some are money management techniques, but when it comes to Swing Trading the use of options can be your best tool.
Some traders think that they protect themselves against big losses, and their corresponding huge draw downs, by putting in “hard stops.” These are stop orders actually placed with your broker so if the market goes down to a certain level, you are automatically taken out.
This approach does protect you most of the time.
But what about when the market GAPS against your position overnight?
If you use a stop order, the price at which you placed your stop, which you thought limited your risk, is never executed. Instead you get filled at a much, much worse price.
For this reason some people use a stop limit order. This way if the market gaps far away from their stop, they do not end up selling at the terrible price. However this doesn’t remedy the situation because they are still in the position at the terrible price … which can get even worse.
Don’t think it will happen to you? Below are just 3 examples that all happened TODAY as I write this.
The best way to protect yourself against these types of dramatic gaps against your position is with option strategies.
If you’re interested in really learning about options, you can take the same options course I took. [disclosure: I’m a compensated affiliate for this program. On the other hand I only recommend things I feel will be of great value]
I will also be giving 3 “gap insurance” techniques in my upcoming Swing Trading Course, due to be released next week.
Whatever approach you decide to employ – make sure you take this issue seriously and have a strategy in your trading plan regarding how you protect yourself against these types of devastating moves against you.
Please leave your comments or questions by clicking on the green “Comments” link at the very bottom of this entry.
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Gaps are a mystery to me. What is the typical cause of Gaps? This is basically the only time I
really get hurt. Now I just get out everyday and
leave a small amount of shares on overnight.
Options looks like a royale pain to me, IE: more
effort for little return.
Regards
Newbie Dave
Dave,
Thanks for your comments. Gaps can be caused by a variety of factors – most often terrible news though.
Options do have a bit of a learning curve to them, that is definitely true. However the greater “pain” is to have your position gap against you and for you to lose thousands of dollars! Options were created as risk management tools and they can be very effective in that capacity, so in my opinion, if a person is going to hold positions overnight, they are worth learning.
Remember, the pro does what the amateur is unwilling to do – and that’s often the very difference between the profitable and unprofitable trader.
Another way to manage risk is to take a position in a stock or other market that trades contrary to your primary position. However I’ve never liked that approach as much since those contrary positions may fall out of alignment at any time. In addition, just because one stock gaps down, doesn’t mean that a contrary stock will gap up by the same amount. Often they don’t.
YES ,YOU DO HAVE A POINT THERE.I PUT A STOP ON A STOCK,AND IT WENT DOWN SO FAST ,IT MISSED MY STOP.WHEN I GOT HOME FROM WORK ,I WAS STILL IN THE TRADE !LOOKING FORWARD TO YOUR NEW COURSE LEONARD
I have been absolutely killed by gaps. And for a guy who has olayed the market all his life I am still an amateur at the age of 59. Just the names “options, put, calls etc” scare the crap out of me. I honestly just don’t feel that I am smart enough to learn that stuff.
To me it’s all about your fund. If you’ve got a lot of fund, for sure your trade will never lose even it bearish 100 pip when u buy it. ALL depend on your money. If you’ve got example like usd 300. It’s done with 1 lot in mini account.
Big losses to overnight gaps is what finally motivated me to learn about and trade options. It does take effort to learn, but is well worth it.
You said that you would be giving ‘3 “gap insurance” techniques’ but I haven’t seen anything about that. Have you done this and if so can you tell me where to find it? Thank you. I really enjoy all the tips and information that you give away for free. In this world of internet/email you never know whom to trust.
Yes, those are included in the Swing Trading Course as promised.
Hello
Lucid, makes logical sense, gives confidence.
Would like any further info.
Thank you
Bob Vincent