Lesson 46: Mrs. B raises her stop and enters a profit/exit order
When we last left Mrs. B she had entered a stop/loss order for her
open long position in May wheat futures and was concentrating on
where her profit/exit order should be. It is now the New Year -
2002 - and Mrs. B remains long May wheat futures. She went long
May wheat on October 17th, 2001. She has held this position for
approximately two and one-half months. During these 75 or so
days, Mrs. B has been doing two things (a) she has remained with her
long position, not being stopped out, and (b) she has exercised
patience. One of the greatest truisms in futures or options
trading is "let your profits run" and "cut your losses
short". Mrs. B doesn't really try to "let her
profits" run and "cut her losses short", she has
simply adopted a trading program that, in and of itself, allows such
a philosophy to be operational. If Mrs. B's stop is not hit,
she stays with her position. This automatically allows her to
stay with her long or short trade and, if there are eventually any
profits, to possibly "let those profits to run". On
the other hand, if Mrs. B's stop is hit, and she is taken out of the
market, this may have the effect of "cutting her losses
short". Mrs. B is actively doing nothing except putting
into practice a trading method in which her winning trades have the
possibility of a longer life span than the life span of her losing trades.
With regard to her stop/loss order, think back to where we last left
Mrs. B,
Mrs. B's initial stop/loss order is entered; it is at 279
½. Just as soon as she feels comfortable in moving it to a
higher level, she plans to do so, trying to reduce her risk to less
than $500.00 on this May wheat trade. As mentioned, she may
move it in less than a week. She may move it in 24-hours.
Mrs. B will watch May wheat to see where it closes each day and raise
her stop/loss as quickly as she feels comfortable in doing so.
Mrs. B hopes that she too doesn't live "under the roof of the
falling tiles". With a recently suffered $500.00 loss, she
doesn't want a second tile to drop with another $500.00 hit attached
to it. Thus, Mrs. B will do everything she can to reduce her
risk from $500.00 to a lesser amount as quickly as the markets allow
her to do so.
Mrs. B believes now is the time to raise her stop/loss order.
On January 3, 2002, Chicago May Wheat Futures closed at 296
½. After the wheat market had closed for the day, Mrs. B
called her commodity broker with the following orders.
"Sell l contract of Chicago May Wheat at $2.87 ½
/Stop - Open Order Good Until Changed or Cancelled"
"Cancel my previous order to "Sell l contract of
Chicago May Wheat at $2.79 ½ /Stop"
These two orders, entered at the same time, are known as "cancel
and replace" orders - canceling the stop at 2.79 ½ and
replacing it with a new stop at 287 ½. If Mrs. B did not
cancel her open stop/loss order at 279 ½, she would have two
open stops for one long position. So Mrs. B cancels her stop at
279 ½ and replaces it with a new stop at 287 ½. Why
did she pick the price of 287 ½ for her new stop? Most
likely, Mrs. B did so for two reasons. First, she wanted to
reduce her risk on this trade and, by raising her stop/loss by 8
cents, if the market does not 'gap' open or open 'limit down', she
should have done that. Second, the lowest trading price of May
wheat futures on the day Mrs. B raised her stop/loss order, January
3, 2002, was 288. She put her new stop/loss order one-half cent
below that lowest price. Having accomplished this, Mrs. B then
proceeded to give her commodity broker a profit/exit order for this
trade. The profit/exit order she gave her broker was as follows:
"Sell l contract of Chicago May Wheat at $3.47 or higher.
This is an Open Order Good Until Changed or Cancelled"
Mrs. B has now two open orders working for her in the wheat
market. A stop/loss entered below her position and a
profit/exit order entered above her position. Mrs. B instructs her
broker that these should be considered as "OCO" orders -
whichever one fills first, the stop/loss order or the profit/exit
order, the other will no longer be needed and should be cancelled - "OCO
- One (if filled) means
to Cancel the Other."
OCO orders can be officially entered on some exchanges, or will be
officially accepted by some brokers. There is, however, no hard
and fast rule as to whether a broker or an exchange will accept the
responsibility of such OCO orders. If Mrs. B's broker would not
officially accept an OCO order, she would simply have to watch the
markets herself and cancel the unnecessary order without her broker's
help. In Mrs. B's case, she has a broker who will watch her
position for her and make sure that if her stop/loss is filled first,
her profit/exit order will be cancelled and vice versa.
Mrs. B has now, theoretically, reduced her risk of loss for this
trade in Chicago May Wheat Futures. She cannot say for a
certainty that she has absolutely reduced her risk of loss in May
Wheat because a gap opening or a limit down opening may mean that her
stop/loss order might be filled below its resting level of 287
½. However, theoretically, she has reduced her risk by
about 8 cents or $400.00. Mrs. B has also entered, for the
first time ever, a profit/exit order for her trade. With the
raising of her stop/loss order and the entry of a profit/exit order,
Mrs. B plans to sleep well on the night of January 3rd, 2002.
She hopes that she will sleep even better for the month of January is over.
To order a copy of Bruce Gould's "Choppy Market Method" to
understand "Mrs. B's" reason for picking May Wheat Futures
at this time, at this price, click
here.
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