[Joe Ross]

Stop placement is where we separate the kids the adults.

Stop placement is the sole responsibility of you as the manager of your trading business. It is one buck that you cannot pass.

You are the end of the line when it comes to placing stops.

Let me show you why you only you can decide where to place the stop. There are several considerations:

The size of your margin account has the greatest effect on stop placement. When you look at a trade see where the stop should go or where you would like it to go you then have to look at the size of your margin account determine whether or not you can even consider the trade.

Your comfort level. Although you may have sufficient margin to place the stop where you would like to although the stop is logical for the trade you may not feel comfortable with the stop being so far away (or even so close) so you will decide not to take the trade with the stop far away or move the stop back if it appears too close.

Volatility. You must take into account market volatility when placing your protective stop. If a market that normally ticks two ticks at a time suddenly begins to tick five ticks at a time you must certainly take the level of volatility into consideration. You may find out that you have to place your stop too far away for the size of your bank or your comfort level.

When you use mental stops there are two other considerations which you must ponder when placing your protective stop. They are: Your speed in placing the order the speed at which your broker can place the order. Let's look at each.

The speed at which you can place the order. This depends upon how fast you think on your feet. There are three factors here: Perception decision action. How long does it take you to perceive that NOW is the time to pick up the phone place your stop in the market? Or NOW is the time to enter your stop via your electronic trading platform?

Then once you make the perception how long does it take you to decide to do something about what you have perceived? Are you quick to decide upon your perceptions? Finally are you quick to act once you have made a decision?

Some of us are very quick in all three areas. Some of us are too slow to utilize mental stops. Only you can tell the experiences you are having in the market whether or not you are quick enough to use mental stops.

Other factors that can enter in are based upon your trading environment. Whether you trade at home or at the office if you are subject to interruptions you dare not use mental stops.

The speed at which your broker can place the order depends upon his organizational setup. The speed at which you can electronically place an order depends upon the speed reliability of your computer the Internet your data feed your broker's computer routing system the exchanges computer system.

If you have a broker who is a "chatty Charlie" watch out. Even though he may not be chatty with you he may fool around with getting your order in while he chats with one of his other clients. If your broker is one who trades a lot he may be taking care of his own before he gets around to taking care of yours.

Other considerations are: Whether or not you are able to call directly to the trade desk on the floor better yet whether you can call directly to someone stationed next to the trading pit.

If you are using mental stops you should time your orders. Find out how long it takes the time you reach for the phone until you hear that you are filled. Test this procedure in several markets on several occasions.

Then if using the telephone you may want to use the "tick-in-half" rule. For every 1/2 minute your order takes * the time you reach for the phone until you get your fill * add one tick to your mental stop. If this is satisfactory slippage then it's okay for you to use mental stops. Time these as flash fills since your mental stops should be market orders.

The number of trades you already have on in other markets can have an effect upon where you place your stop. If you are already pretty well margined-up you may not be able to financially or comfortably afford to put on another trade with the protective stop in the place you feel right in having it. In that event it's best to pass this trade or liquidate another trade so that you can comfortably enter the one you are contemplating. Remember if you overtrade put on too many trades you will get into trouble have to place your stops too close.

There are other considerations that may be involved in special situations which affect where you will place your protective stop whether or not you want to take the trade when you see where that stop will be.

The main point is if you can't place the protective stop where it should be don't enter the trade.

I think that the previous discussion you should be able to see that protective stop placement takes a good deal of planning thought. It's part of what you do the 85% of the time that you are a trader.

Remember? The markets trend only 15% of the time. You should be trading only 15% of the time. The other 85% of the time you should be planning organizing delegating directing controlling. That is what a good manager does. Inherent in owning operating your trading business is proper management.

Joe Ross