Last night I found myself chatting with a few folks online about the comparative merits of Forex non-dealing and dealing desk brokerage when the conversation turned to a discussion of stop losses - whether to use them or not. One trader asked those in attendance if anyone was trading without using them. Another responded in the affirmative. The exchange that ensued was quite informative so I decided to pass the gist of it along to everyone. As every experienced trader knows, when you set a stop loss you’re essentially limiting your losses. It isn’t guaranteed to stop the bleeding at market but it will most certainly stop the bleeding. When stops are not used, however, losses can prove to be catastrophic.
The conversation led everyone in the room to think about what they might do if they made a call without using a stop loss and experienced one or more of the following technical problems.
1. Your computer freezes up or crashes.
2. Your cable or DSL provider goes down.
3. Your incoming phone line goes dead.
4. The electricity goes out.
Interestingly, few in attendance had really given any thought to contingency plans so they were all ears when the trader who asked the question started to share what he had done to protect himself.
At one time he reported that he had two computers running - one connected to the trading room via cable, the other via dial-up. If one terminal died or access was lost, he would revert to the other. His thinking about that changed one night, however, when he returned from dinner to discover that the electricity was out. Fortunately, he didn't have any open positions but it made him realize that redundant access wasn't the solution.
A day later he returned to using a single computer. Why? He has his cell phone programmed to speed dial his broker so in the event he decides to trade without placing a stop loss and loses any one or all of the aforementioned tools and utilities, he can immediately contact the broker to close all of his open positions.
This is common knowledge, but to new traders it’s the kind of information that could easily prove to be the difference between success and catastrophic failure.
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