Hi
There is no absolutely perfect money-management tool in futures trading, although purchasing options on futures does limit your risk of loss to the amount paid for the option. Purchasing options does have its disadvantages, however, and I won't go into that in this feature. What I will focus upon in this educational feature is the placement of protective stops (a sell stop if you are going long and a buy stop if you are going short) in futures trading. Protective stops are not a perfect money-management tool, but they are very effective in helping to solve one of the most important elements of futures trading: When to exit a position.
Before I discuss the advantages of using protective stops, I want to discuss a disadvantage about which many long-time traders are fully aware: Floor traders in the pits "gunning" for stops. This is a real phenomenon whereby "local" floor traders (those who trade for their own account) think they know where most of the resting buy or sell stops are located, and then attempt to push prices into those stops, set them off, and then let the corresponding price move run its course, only to then take profits on that move and the market price then returns to near levels seen before traders went gunning for the stops. This action by floor traders is not illegal or even unethical--it's just a part of futures trading. These floor traders have to pay a lot of money (or their sponsor pays their fees) to trade in the trading pits on the exchange floor. They do have some advantages over off-floor traders and, importantly, they also provide the needed market liquidity that all traders and hedgers appreciate.
Floor traders gunning for stops is more an art than science, as market conditions have to be just right for their efforts to pay off. For "local" floor traders to push a market in their desired direction, outside fundamental factors need to be about in equilibrium and not having an influence on market prices. For example, any floor traders gunning for sell stops just under the current market price won't get the job done if there were a bullish fundamental development that would pushes prices higher. Remember, no one group of traders--not even floor traders--can influence market prices very much or for very long.
Also, sometimes floor traders think they know where stops are located, and when they push a market and try to force a bigger price move, they do not find the stops and then they are forced to cover their trades at a loss.
A longtime friend of mine and former Chicago Board of Trade grain floor trader, John Kleist-now a highly respected grain and livestock market analyst--told me the following about locals gunning for stops: "Back in the 1970s and most of the 1980s were really the 'last hurrah' for locals wanting to gun stops. And it basically was in the 1990s when better (and more transparent) communication allowed important news to filter 'down' to the pits, rather than 'up' from the trading floor. Locals gunning for stops now is usually more effective in illiquid trading pits, such as the hogs or bellies--and less effective in soybeans and wheat, and very difficult in the corn pit. Gunning for stops has been replaced by locals coat-tailing the commodity funds and exaggerating price moves. Maybe that's the same effect but done a different way. Stops have to be relatively nearby current prices--i.e. support/resistance areas commonly used as 'public' stop areas, if the locals are to be effective. And, of course, if near major moving averages in the case of the funds."
Before I discuss the advantages of using protective stops, I want to discuss a disadvantage about which many long-time traders are fully aware: Floor traders in the pits "gunning" for stops. This is a real phenomenon whereby "local" floor traders (those who trade for their own account) think they know where most of the resting buy or sell stops are located, and then attempt to push prices into those stops, set them off, and then let the corresponding price move run its course, only to then take profits on that move and the market price then returns to near levels seen before traders went gunning for the stops. This action by floor traders is not illegal or even unethical--it's just a part of futures trading. These floor traders have to pay a lot of money (or their sponsor pays their fees) to trade in the trading pits on the exchange floor. They do have some advantages over off-floor traders and, importantly, they also provide the needed market liquidity that all traders and hedgers appreciate.
Floor traders gunning for stops is more an art than science, as market conditions have to be just right for their efforts to pay off. For "local" floor traders to push a market in their desired direction, outside fundamental factors need to be about in equilibrium and not having an influence on market prices. For example, any floor traders gunning for sell stops just under the current market price won't get the job done if there were a bullish fundamental development that would pushes prices higher. Remember, no one group of traders--not even floor traders--can influence market prices very much or for very long.
Also, sometimes floor traders think they know where stops are located, and when they push a market and try to force a bigger price move, they do not find the stops and then they are forced to cover their trades at a loss.
A longtime friend of mine and former Chicago Board of Trade grain floor trader, John Kleist-now a highly respected grain and livestock market analyst--told me the following about locals gunning for stops: "Back in the 1970s and most of the 1980s were really the 'last hurrah' for locals wanting to gun stops. And it basically was in the 1990s when better (and more transparent) communication allowed important news to filter 'down' to the pits, rather than 'up' from the trading floor. Locals gunning for stops now is usually more effective in illiquid trading pits, such as the hogs or bellies--and less effective in soybeans and wheat, and very difficult in the corn pit. Gunning for stops has been replaced by locals coat-tailing the commodity funds and exaggerating price moves. Maybe that's the same effect but done a different way. Stops have to be relatively nearby current prices--i.e. support/resistance areas commonly used as 'public' stop areas, if the locals are to be effective. And, of course, if near major moving averages in the case of the funds."
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