Wednesday, 19 November 2008

Stop Loss Orders

I have been asked why I don't use stop loss orders.

Stop loss orders are an order to cut a position when certain levels are reached to stop the loss getting any greater. I don't usually use them.

I do use "review levels", which are internal levels that I use to re-assess whether the position in place is still valid, or whether to just cut and run. The recent huge volatility in the markets are a case in point. The fall in the USD/JPY was nasty, and at 90.00 I would have been looking at some big losses.

So before it got that bad, I took some alternate positions as follows:

Original trades are 3m USD long short Yen at 103.10. (1m 105.66, 1m 104.00, 1m 99.64)
I sold USD1.5m bought Yen at 96.72 on 23 Oct and again sold USD1.5m at 97.21 bought Yen on 24 October (average 96.97) thus making the overall USD position bought and sold, but essentially square with a loss between the 5 trades of Yen18,390,000 or USD189,646.28.

So effectively I have locked in the loss and the 5 trades are in the "deep freeze" until I close them out or take the hit.

What I am looking to do is cut the 3m at under 96.97 and take a cash gain, with a greater unrealised loss on the original trades, then look for the USD/JPY to move back over 103.00 to make a profit overall.

But need equity markets to calm down first, so still waiting. But these trades are not what I would normally do, but when the markets are so unruly, protection is the best policy untill all calms down.

Still have the NZD/JPY carry trade, will add further if we see a move to 51.00, as I see this cross getting back to 80.00 over time.

Review levels are 90.00 in the USD/JPY and 50.00 in the NZD/JPY.


thelonelytrader said...

I am getting into the same trade idea with NZDJPY -- only at 50.80. I will enter lower in larger size, in increments of 425bps or so. I really don't see RBNZ lowering key interest rates to parity with the least not for a very long time. And I don't see relative value moving much below 40...if it even gets there. I think carry specs are sniffing around now at value and this should be supportive in several JPY crosses. I have a couple of entry orders ready to go in AUDJPY as well...although I think AUD has a bit more to go before it starts scraping its bottom.

Interesting blog. I'll check in from time to time.

Tim said...

Re: 'I see this cross getting back to 80.00 over time' - as do I - but I'm thinking more like a year or 2 to get there? (Partly from naiively looking at the slow upslope of the last cycle, partly from a feeling that the air hasn't fully escaped from the NZD bubble...)

Tim said...

Or even 10 cos what do I know. :)

Kiwi Trader said...

Tim, my time horizon is generally long anyway... so NZD/YEN to 80.00 over next year or so, and picking up 4 odd pct along the way!

Kiwi Trader said...

Lonely Trader
Thanks for the comments. You have an interesting blog as well. I will add you to my blog roll in the weekend.

thelonelytrader said...

Hope you're right about NZDJPY! Thanks for the link. I'll do likewise. I think amateur traders like me could really benefit from reading this blog -- if only to admire the currency charts. [wink]