Time as a concept of Stop-Loss
Time is often factor in trading that is completely overlooked, but it can help traders make potentially better trading decisions, increase the bottom line and help cut losing trades effectively. Regardless of current trading style and system, the trading-time component can be used by all types of traders to improve their decision making process and add a completely new layer of due-diligence to trading. This is simply another variable you can use with your stop-loss.
The time stop – an introduction
Do not confuse the concept of the “time stop” with holding time or any other time related performance metrics. Whereas holding time only calculates how long you hold your trades, the “time stop” concept sets price action in relation to time and evaluates price movements based on how ‘fast’ they happen, or don’t happen. The time stop concept helps you look beyond price action into how traders move the market. There are 3 main usages for the time stops and all 3 can be used to improve the quality of your trades.
1) Your entry
How often did you enter a trade and then nothing happened and price kept hovering around the same price level for hours? It happens all the time, but traders just accept it as “something that price does” and do no spend any time evaluating how it impacts their trades or what it really says about price dynamics.
If you have identified a trade setup and believe that price is going higher, you enter a buy trade and then price doesn’t move, what should you do? Most traders will just wait it out and hope that price will finally make a move.
If your trade idea suggests higher prices at a certain price level, or based on a specific setup, and price does not follow through, it is usually better to get out of that trade. If price does not move, but you believed it would go higher, your trade idea is invalid and staying in a trade becomes a gamble.
2) Cutting losses like a professional
The next example describes the scenario when you enter a trade and price immediately goes against you. Often, traders find themselves in trades and price hovers back and forth between their entry and their stop loss. Traders don’t like to cut losses because they still believe (hope) that price is going to reverse and turn into a profit.
Again, remind yourself of your original trade idea – often, traders forget their trade plan once in a trade and let their emotions take over. If you believed that price would go higher, but then price just moves back and forth at a much lower level, the price move is lacking buyers and you have to re-evaluate your bullish trade idea. Just staying in a losing trade, hoping to get out for break-even shows amateur thinking and has to be avoided. Cut your loss, don’t risk losing more on a setup that does not support your idea and move on to the next trade.
3) Gambling for profits
The third case describes the scenario when traders are in a winning position but price stops ahead of their take profit order. What do you do now? Do you wait and hope that price will keep going and risk giving back profits? Do you close your trade and accept a smaller profit? Or do you protect your position?
Too often, traders become too greedy and they risk giving back a big portion of their profits, hoping to make only a little bit more and prove that their idea was right. Or, they become too fearful and close their trade too early, missing out on potential profits. As you can see, the question how to deal with unrealized profits is not an easy one to answer.
The concept of the time stop suggests that you get out of a trade when it is not doing what you anticipated. Staying in a trade hoping that it makes the few extra points, is not a valid trading concept. If price does not move, it shows equality between buyers and sellers and indecision in the market. Future price moves are then unforeseeable and hoping for a certain outcome becomes a gamble.
The time stop: a new tool for your trading arsenal
As you can see, the time-spot is a universal concept that can be used by any trader and it is a great addition to your current trading approach. The time stop helps you evaluate price movements in a new light and helps you understand why you are in a trade; it supports your decision making process. The time stop is not a tool in the actual sense, but it describes how the financial markets work and it helps you understand the dynamics behind price movements.
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There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.
The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.