Something to know about stop orders …

Discussion in 'Online Brokers' started by Brooks, Jun 7, 2018.

  1. Brooks

    Brooks Well-Known Member

    Stop/Stop-Limit orders can be helpful for enforcing a max loss strategy, especially if you can’t be in front of a trading screen during all the hours the market is open. A standing order, decided in advance, can also take some of the emotion out of trading and act faster (possibly reducing losses) than you would be able to do manually.

    Stop orders are based on some aspect of price and the choices can vary broker to broker but Mark and Bid may be common choices.

    Unfortunately, during times of high market volatility (such as around Fed announcements, other major news, last trading day of the month, etc.), the Bid, Ask and Mark can temporarily go to extremes causing your stop to be hit. Often the extreme prices may last only a few seconds, but it is still long enough to trigger your stop, when it would not have been otherwise triggered.

    Depending on the situation, this may cause losses or just be inconvenient. You can try to re-enter the position, but you may not get in at favorable prices. And at the least you will have two extra sets of unnecessary commissions.

    What I learned this week is when this happens; you can call your broker’s trade desk and request that the trade be “busted” (i.e. cancelled). There are several things to know. First, this is a request, not a guarantee. The desk will verify that the problem is some temporary insanity in the market and not a mistake on your park. If the trader on the desk agrees, they will need to call their back office who, in turn, will contact the market maker to see if something can be done. Second, the sooner you make the request, the better. Ideally, you want to make the request the same day and before the market closes. The longer you wait to request the bust, the lower your chances. If you wait more than a day, your chances may be nil.

    An alternative to using stop orders is to use alerts. You can have alerts go to your computer and/or your cell phone. This is viable. Problems with alerts, even to a cell phone, is that there can be occasions where you are away from the phone, be out of a cell tower range, have it turned off or have the sound turned down and miss the alert.

    Stop limit orders vs. stop orders have pros and cons. A stop order will become a market order when triggered. If the extreme market conditions are still in effect, you could get a very bad fill. But at least you are out of the trade. A stop limit order with a limit price placed (say 15 cents away) from the stop price will at least insure that your fill price is not too bad. But if the market has moved past your limit price you may not get filled at all, so there is risk there.

    The above experience came from doing credit spreads on indexes.

    It would be interesting to hear of other trader’s experience with using stop/stop-limit orders.
  2. Marcas

    Marcas Well-Known Member

    Thanks for this post, most practical. I don't use stop orders for reasons you mentioned above. My way of dealing with the problem in the past was to monitor market frequently when expecting moves that could be dangerous to my positions. I was aware of risk doing it this way and usually didn't allow to put myself into position to be hit by devastating losses. If remember correctly, I was using Stop orders long time ago when trailing positions, it was without knowledge you presented above.
    I'm surprised that filled orders can be 'busted' the way you described.
  3. Brooks

    Brooks Well-Known Member

    You're welcome.
    "I'm surprised that filled orders can be 'busted' the way you described."
    They were quiet clear that there are no guarantees and it has to be extenuating market circumstances and something that is not the trader's mistake.
  4. status1

    status1 Well-Known Member

    I am guessing this may occur in a case of a flash crash or some unusual activity or glitch
    I would be surprised if every time there is a normal big move that you can just cancel the trade

    I have never used stop orders If I feel the need to use stop orders that means I am too close to the trading range and market swings I usually use just a mental stop which is usually just the short of the spread and even then I don't just close it I try to make an adjustment to roll out the trade and perhaps place a limit order where I can get out with a small loss or gain and than place a new trade right away to take advantage of the higher volatility
  5. Brooks

    Brooks Well-Known Member

    "I would be surprised if every time there is a normal big move that you can just cancel the trade."

    It's not really about a big move, it's more about temporary craziness in prices. An example would help. Say the current Mark on a credit spread is 1.00 and my stop order has a stop price of 2.00. There is a Fed announcement today and at some point the Mark on the spread goes from 1.00 to 10.00 for just 2 seconds, then returns to 1.00 or 0.90 or 1.10. During the 2 seconds it's at 10.00, the stop is triggered, my order gets filled and I'm out of the market and really didn't want to be out of the market. If not for the 2 seconds of craziness, I wouldn't be out of the market. This is where they might bust the order.

    We have different trading styles. You sound like more of a discretionary trader and it sounds like you are in front of the screen all day with a mental stop. I'm more of a systematic trader and, as previously mentioned, I don't want to be in front of the screen all day. I'm not saying one way is better than the other, just that they are different.

    I don't do adjustments which is a whole other subject. For me, I've found that doing adjustments adds complexity and they can backfire. Also, usually, they lock in a loss and result in more margin being needed in an effort to save the trade. I trade frequently and for my trading method, I found its better to take a max loss and move onto the next trade.
  6. status1

    status1 Well-Known Member

    I would say your example would fall under my category of flash crash or a glitch I would not call that normal trading

    I have a pc at work but I am not watching the market all day Occasionally I would go online for just a few seconds to see how the markets open just to have a sense of direction and to know what to expect for the day I have it set so the home screen is on google finance and set for SPX so I open it see the price and close it

    I also don't do adjustments unless I have to and I have not done any since the Feb sell off
    I give the market plenty of room to move around so that's why I don't use stops and I don't have to be in front of the screen all day
    I understand every trader is different and each has their own trading style whatever works best for them
  7. AKJ

    AKJ Well-Known Member

    did you get the trade busted? I would be quite surprised if they busted the trade that you described, as the "temporary craziness" you describe is more like "business as usual" in my estimation.
  8. Brooks

    Brooks Well-Known Member

    And my stops were hit again today due to the FOMC announcement. My request to bust the trade was refused, so don't count on this. The fact that you can request a bust may be helpful for other "bad" triggers or fills. I'm looking at taking off stop orders prior to major announcements like FOMC. There are dangers in this too, if the market really starts moving adversely due to the announcement. The joys of trading!
  9. status1

    status1 Well-Known Member

    Just curious was this in SPX or some other underlying ? How close was your stop to the ATM ?
    I looked at the SPX 1 minute chart and I did not see any unusual activity or craziness
    Is your stop too close perhaps ?
  10. Brooks

    Brooks Well-Known Member

    No, not SPX, it was RUT.
    These were nowhere near ATM, they were at a delta of about 8 (vs a delta of 50 for ATM).
    At 1:59 pm EST, the bid/ask was something like 3.10/3.60, a 0.50 spread, or a mark of about 3.35.
    At 2:00 pm EST, for several seconds, the bid/ask changed to 0.00/10.00, a 10.00 spread, or a mark of about 5.00.
    After several seconds, the bid/ask spread returned to normal, but it was long enough to trigger a stop order.
    There were actually 2 legs to the credit spread, but you get the idea ... in order to cease trading, the market makers cause the bid/ask spread to be insanely wide for X seconds.
  11. AKJ

    AKJ Well-Known Member

    solutions seems pretty obvious. don't use stop orders on options.
  12. Brooks

    Brooks Well-Known Member

    They are of benefit when they work well, which is the vast majority of the time.
  13. AKJ

    AKJ Well-Known Member

    by all means, keep using them if you are so inclined. I'm just sharing with you my personal opinion that it will end up costing you more money than it will save.
  14. status1

    status1 Well-Known Member

    Are you saying that your trade is at 8 delta or that your stop was at 8 delta ?
    I suppose that can happen when it's that far OTM I am guessing it's probably lower volume especially on the $5 strikes
    I think the SPX is somewhat better as far as the volume I try not to use the $5 strike except for the $25 which have the best volume
    If your trade was at 8 delta on a credit spread I would see no reason to use a stop loss since the loss is already defined unless you are risking too much or dpn't want to see any losses at all
    Maybe a stop/limit might work better in your case if the price goes past your limit than it will not get filled for those couple of seconds than it may or may not get filled when the price returns to normal

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