When To Place A Stop While Daytrading

A daytrading stop should also be placed if the operator is obliged to leave his tape ticker for more than a moment, or if the ticker suddenly is out of order. While he has his eye on the tape the daytrading market will I tell him what to do. The moment this condition does not exist he must act as he would if temporarily stricken blind - he must protect himself from forces which may attack him in the dark.

I know a trader who once bought 500 shares of Sugar and then went out to lunch. He paid 10 dollars for what he ate, but on returning to the tape he found that the total cost of that lunch was $5,000 and 10 dollars! He had left no stop order, Sugar went down ten points, and his daytrading broker sent him a margin call.

The ticker has a habit of becoming incoherent at the most critical points of daytrading. Curse it as we may, it will resume printing intelligibly when the trouble is overcome - not before. As the loss of even a few quotations may be important, a daytrading stop should be placed at once and left in until the flow of prices is resumed.

If a trade is carried over night, a stop should be entered against the possibility of accident to the daytrading market or the trader. An important event may develop before the next day's opening by which the stock will be violently affected. The trader may be taken ill, be delayed in arrival, or in some way be incapacitated. A certain allowance must be made for accidents of every kind.

As to where the daytrading stop should be placed under such conditions, this depends upon circumstances. The consensus of shrewd and experienced traders is in favor of two points maximum gross loss incurred while daytrading. This is purely arbitrary, however. The tape reader knows, as a rule, what to do when he is daytrading at the tape, but if he is separated from the market by any contingency, he will he obliged to fall back upon the arbitrary stop.

A closer stop may be obtained by noting the "points of resistance" in a stock while daytrading - the levels at which the market turns after a reaction. For example, if you are short at 130 and the stock breaks to 128, rallies to 129, and then turns down again, the point of resistance is 129. The more time it turns at 129 the stronger the case you have.

In case of temporary absence or interruption to the service, a good stop would be 129¼ or 129¼. These "points of resistance" will be more fully discussed in a later article.