In this article, we are going to address the same problem of getting hit on your stoploss for trades that never go your way.
The Market Should Earn Your Stop – It’s Not A Participation Trophy
First of all – I want you to change your perspective on your stop loss. A full stop-loss – is something the market should earn from you. You should NOT let the market take it when it hasn’t earned it, especially on trades that fail from the very moment you take them.
Think about it – you get into a trade and it doesn’t move your way even 1 tick, yet you hold it till it hits your full stop at 15 or 20 ticks? Why? Not even 1 tick in your direction – and you want to pay a full stoploss?
Earning The Stop With a ‘Pop’
We mentioned earning a full stop. Imagine doing this with your trades.
You have a 16-tick stop
Market Moves your way 5 ticks
You move the stop to break-even
Market gets to 8 ticks and fills your first target
You now loosen your stop back to 18 ticks
Is that madness? Not really, although I’ll admit it may seem unusual. If we are right about a trade, means the market will soon react around our point of entry – as in the market should “go our way” a little, right?
That means – an aggressive multi-tick move in our direction – because Traders did the thing we expected them to do. After all – if you predict buyers will come in after you enter and they do – they are going to cause a little spike, a little excitement, you’ll see higher offers get hit and the price won’t immediately fall back down. Something changes – confirming your entry. Now – you might get in AFTER the pop – and that’s fine too – but you should still see some continuation after the pop – maybe not as fast – but still – higher prices that stick.
Many trades don’t go our way – some not even a tick. That is the OPPOSITE of the market confirming you are right. When this happens – when NOTHING happens at all but the market just marches down to your stop – you should cut the trade.
Many trades go our way but falter. Often the market will lift from our entry point but it’s not a “POP” – it is fighting for every tick gained, it’s ticking up but then quickly getting knocked down. This stretches out over minutes and 5 mins after entry – you are still just a few ticks above your entry price. It’s not popping, there’s no continuation move. For me – the tell – can it fill me on my first target (say 8 ticks on S&P500 right now) – and you know what – it often gets to that first target and doesn’t fill it. If I can’t get 8 ticks reaction on the 2025 Volatility S&P500 from a pullback (or other) entry – then I’m wrong and you know what – the market hasn’t done anything to earn that full stop. So for sure – if you move my way but can’t give me 8 ticks – that’s a failed trade – failed to follow through, failed to confirm my trade idea was right.
On the other hand – if the market pops to my first target, I will then say “OK – you’ve earned a full stop”. So a trade with an initial “emergency” 16 ticks stop will be tightened to break even after moving 5 ticks. After moving to 8 ticks and giving me a fill, I’ll drop it back to 16 ticks and let it play out. Quirky I know – but that 8-tick fill – that’s what I need to be able to say “This might be confirming my trade idea – let’s let it play out”.
Now – what constitutes a “pop” is different in each market. On Treasuries, you might be looking for 2-3 ticks. The faster the market, the more ticks you need in a move for it to be considered a pop, a change in heart for enough traders to leave
Step 2 – Implement Post-Trade Confirmation
Post Trade Confirmation is quite simple. Exit your trade if one of the following happens
Absolutely nothing changed since you entered, there’s been no absorption or slow down – the market simply waltzed through your entry price like a knife through butter. Your hypothesis was wrong. There is no reason to pay up a full stop. Exit.
The market moves your way but is so weak, it can’t even “pop” or fill a small target like 8 ticks. Ticks up are not holding but ticks down are. Don’t let it fall back through your entry and to your full stop. It hasn’t earned it.
5-mins have passed and you got nowhere. Sadly the “5 mins” is market specific. You probably won’t be waiting 5 mins on a Nasdaq trade. You do have to give it time to pop and it is a good thing that the market has changed behavior – it came down to your entry, you got in long and it’s no longer going down. That’s a change in behavior but the change you want is the opposition to come in on your side. If you have a good entry spot – then FOR SURE – other buyers can see it slowed down – but if that’s not enough to make THEM jump in – then it’s only a matter of time before it recommences the move down.
Final Thoughts
The way I see it – if the market can’t give you a lousy 6-8 ticks off a good setup – then it didn’t earn your full stop. That should be reserved breathing room for good trades. Those that are lousy from the start didn’t earn your full stop. And if your market falters – hovers around your exit and the “good guys” still can’t come in on your side – then I’m afraid that the cavalry are busy today – run for the hills.
