Origin of the “floating-stop-loss” – How former days of broking shaped a trading career
|Walking past customer service, a phone rings. Seeing the staff all attending to other calls, I answer it.
"Sir, I have a problem with your trading platform. Why isn't there an option to stop the market from hitting my stop loss?"
"Can you elaborate please?"
"When price moves to my stop loss, it gets me out."
"Okay, let me check what's happening... You're saying you placed a stop-loss order. And when the price traded at the same price as your stop loss, your stop loss order was triggered, exiting you from the market. Is that what happened?"
"Yes, that's the problem."
"What? Was there a problem with the price your order traded at?"
"No, it traded at the price of my stop loss."
Thinking there might be a crossed wire or misunderstanding, I asked for more details.
"Right. Please elaborate?"
"If the price is about to hit my stop loss, why isn't an option to automatically move my stop loss further away?"
Momentarily confused, it then dawned on me.
"Aaaah, okay, let me check I have this right... You place a stop loss order because you are setting a minimum amount of money you're prepared to lose on your trade if it doesn't go your way: right so far?"
"Ye-es" (sounding more like "sort of")
"But, if the price looks like it is about to trigger your stop-loss order, you want the stop-loss order to move further away so it doesn't get hit."
"Yes, yes"
"So you want a "floating stop-loss" so you don't get stopped out if the price moves close to your" he cuts me off:
"Yes, yes, how do I do it?".....
And so the term 'floating-stop-loss" was born.
So why the story? Was it unusual? Yes and no. The request certainly was a first, but what's happening within that trader's mind is extremely common, as you'll see in a minute.
A profound discovery in trading is realizing you're not unique. If you're not unique, then every trader isn't unique. Who hasn't moved a stop-loss? "I'll just give it a bit more room." Sound familiar? No One Is Unique. Lightbulb moment!
More on that in a moment. Meanwhile, why does this moving of stops happen? Traders move stops when they:
-
Don't accept the outcome of each trade as random.
-
Have an expectation the market will act a certain way.
-
Have a fear of losing money.
-
Don't want to be wrong.
Look: When you've traded a strategy hundreds of times that has a legitimate edge a funny thing happens:
-
You've doubted time and time again a trade will work, only to see it work.
-
Repeatedly, you've been sure "this trade" will work, only to see it lose.
-
And yet despite all of that:
-
Overall you make money.
Therefore you see the root cause of moving your stop is no trading edge. Because you only have a trading edge if you've traded a specific strategy so many times you've proved beyond doubt it has positive expectancy.
You can't help develop new internal beliefs:
-
You accept the outcome of each trade is random.
-
You ignore acting on what you think, only acting on your edge.
You're not fearful of losing money on the next trade because your edge makes you money over a meaningful sample size of trades. So the more trades you make, the sooner you experience profit.
You're indifferent towards trade outcomes because you've learned making money has zero to do with being right or wrong. Right? Back to the lightbulb ...
What eventually happens when you move a stop further away? You experience a drawdown so painful you must exit the market. This phenomenon occurs over and over every day in the market. Which is why every day traders are making a living taking the other side of the traders who say:
-
"It'll come back".
-
"I'll give it a bit more room".
-
"I'm down so much now, I'll just wait 'til it gets back to breakeven".
And you know how this ends, right? So you can provide a service to traders who must exit the market:
"I provide liquidity to traders on the wrong side of the market. I take on inventory at one price and offer it to traders exiting losing trades at a difference to make a profit.".
You've just read my trading business description.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.