Maintaining hard stops on positions can prove to be a valuable safety net. Not only can they prevent damage in a fast-moving market, but resting stops also benefit traders who struggle to take action when it’s time to cut a position loose.
Sometimes a time stop can be appropriate, too. One of the biggest advantages of trading is the flexibility it offers when it comes to how your capital is allocated. Having capital tied up in a stagnant position means exposure to risk without reward, and can also mean missed opportunity elsewhere.
The type of play being taken can certainly warrant varying expectations in terms of how quickly a trade works.
For example, breakout plays should move rather quickly due to the fresh momentum found once a key level is cleared. Those are typically found within existing trends, so the continuation of that direction tends to persist.
On the other hand, a reversal play within a trading range can deserve a little more time to work, simply because inherently a trading range lacks decisive price action. Prices tend to drift back and forth, so those plays naturally may require greater patience while waiting for a move to develop.
In my own trading, I won’t compromise on hard stops, so when a level is broken I’ll close it out. However, sometimes I need to decide whether a time stop is appropriate and in those cases I’m considering the type of play first. Next, I’ll ask some critical questions, such as:
Am I spread a bit too thin and now my capital is needed elsewhere for another good opportunity I see? Do I have very little exposure and therefore have the ability to remain patient with this play? Does the price action warrant staying with this trade for now (ex: I’m long and there are more positives than negatives in the price action or volume).
Here’s an example. You caught a nice runup and then price shifts into a digestion phase. It’s now basing and could eventually lead to higher prices (should it break out to the upside). However, for now, it’s doing nothing but tying up your capital. When another setup with some appeal comes along, it’s decision time – is the trade still worth staying in, or should you roll your capital into a setup that looks to have imminent potential? If you choose the latter, it’s easy to set an alert upon a breakout in the current name to re-enter once it’s back on the move. In the meantime though, your capital may actually be working for you elsewhere.
As you place your next trade, have some expectation for how it will unfold. Be realistic, because while we’d all love to see our final targets met within the first day, it’s likely we’ll have to wait longer than that. And as the trade matures, continually ask objective questions to determine if it has become dead money or if instead it deserves a little more time tying up your capital.
Implementing the Time Stop
Trade Like a Bandit!
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