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Stops Are Overrated

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Tuesday, January 20, 2009 at 2:40PM

Gap Guy tagged

S&P 500 in

Stops

Stops are critical of course, but for gap trading, stop size is overrated in my opinion.

Why? Consider the chart below that shows the historical win rate and profit factor for various size stops when fading the opening gap in the E-mini S&P 500 futures over the past 10 years.

Often folks will tell me that they can't stomach the large stops that I use. My standard retort is that I can't stomach being stopped out a bunch of times in a row. Pick your poison. In the grand scheme, making money trading gaps is not about picking the right size stop to use. It's about picking the right gaps to play.

Click here to see an interview of me discussing gaps and stops with Tim Bourquin, the co-founder of The Traders Expo and The Forex Trading Expo.

(BTW: if you are wondering whether I faded today's gap and got stopped - I did not. It failed my system's criteria for an optimal gap fade in this normally high probability zone. Plus, as I explained to members, historical seasonality for fading "down" gaps on this day of the month was (is) terrible: ~60% win rate when exiting at the end of the day.)

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Important Disclaimer: The analysis and information on this site is provided for informational purposes only. Nothing contained herein should be interpreted as personalized investment advice. Under no circumstances does this information represent a recommendation to buy, sell or hold any security. None of the information on this site is guaranteed to be correct, and anything written here should be subject to independent verification. You, and you alone, are solely responsible for any investment decisions you make! Futures, options, and spot currency trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.