Lately I've been hesitant to put stop orders in against my positions, and I'm curious as to what you think of my reasoning. Example: Imagine being long on Nasdaq:MU for 10000 shares, BOT at $18.71. A GTC stop order is entered at $18.50. What I really dislike is that you have created liquidity against your own position. Liquidity has value, and effect on the market. The appearance of this liquidity on the order book might have the effect of drawing the price down. If you don your tinfoil hat for a moment, you might believe that the broker's algobots have funding at their disposal to move the price. Said bots sell to move the price down 21 cents, touch your stop order, grab the commissions, and then cover. Furthermore, just how effective is a stop order? In the case of a downspike, when the stop price is breached, the stop order becomes a market order, and it may be filled well below the entered stop price.
The price you choose for your stop makes sense to you and might make sense to 100 other traders. Each one of those 100 trades got into their positions at different times and and at different prices, but if they all try to get out at the same time, that can create a bad situation.
True. That's a short/long squeeze, but beside the point. I question the practice of creating liquidity against yourself. A stop loss order creates liquidity against your position. It may encourage the price to move against you.
One of those tough decisions on stops. Often stop runs take your position at a loss and immediately rebound and in those cases using stops really does suck BUT a stop also protects or helps protect from that swift move in the opposite direction of your trade.
Greetings Kmiklas, You Said: “Lately I've been hesitant to put stop orders in against my positions, and I'm curious as to what you think of my reasoning…..etc.” My Response: I believe that if you are trading a method with a “Proven Positive Expectancy”,....and why on earth would you attempt to trade with anything else, then why should or would the placement of your “Stoploss” cause you any mental discomfort, consternation, or second guessing? You should already know that the "odds" favor that you should be able to win this game, after a statistically significant series of trades has been played. As Sun Tzu said in the Art of War: “The battle is won before the battle has begun”. The Stoploss itself is just an essential part and tool of a proven whole method, and one which should have already been completely and thoroughly vetted in place before engaging in live trading. There is no magic placement in it, except for what has been statistically verified and validated. Therefore, in this particular case you have outlined, I don’t believe that the problem you are experiencing here is with the simple tool known as the "Stoploss". I believe that the root "cause" of your hesitancy is emanating from a different "effect". Hope you can see my point of view. And I hope you find this perspective and line of reasoning helpful. KDASFTG
It's all about where the stop is placed provided your in liquid stocks which MU certainly is. I use ATR based on several time periods (1,5,20) to figure out how far away I need to be to not get stopped out on noise and have my platform set up to execute the stop order on a double NBBO print. Most people are very predictable placing there stop loss a few ticks below an obvious are of support or resistance when a few days or more of a price channel sets up - this causes a lot of clustered orders to pile up. An HFT or hedge fund can and will run price to pick up stops in these clustered zones - with futures they often pick off both sides. The trick is to think like the stop gunners - where are the clustered orders?. That is one place not to have a stop - the other areas to avoid are whole numbers and popular moving averages to name a few.
If a broker traded against your hidden stop that way, they would be guilty of a crime. Mechanical stop's are tricky at best. You could just as easily be tagged at the extreme of the move, as get out at a better price. Nothing easy about trading.
I've never had any success with stop orders. It's like standing on the 50th floor and throwing money out the window ,…IMO. Using delta neutral puts against the underlier, …my preference.
Maybe you should never liquidate your position. Then you can sleep better at night and you won't ever have to "create liquidity against your own position."
Happens all the time. The HS/HFT firm algos can access deep book data, and trade against the order queue on a daily basis. If they take a position and see volume piling up on the opposite side, they dump it to the person in line behind them.