One of our new trainees noticed with frustration in his voice that he was getting stopped out more in his swing trades. Adam Grimes and I sat in my office discussing more little trades we were getting stopped out on intraday. I read about this complaint in the blogosphere and all things Twitter. Let me offer a potential reason.
So you probably have heard about this HFT (High Frequency Trading) thing. More orders are being handled by machines programmed to be faster than you can blink your eyes and smarter than most dis-cretionary traders. I have noticed a new algorithm dominating the Street. It’s on the bid side and the offer side. I’ve seen it before but noticed it’s on more desks of late.
So let’s say you’re trading ABC with a stop at 29.84. Thirty is a level but you are giving the stock some room. ABC drops 30 and a more conservative intraday trader goes to whack the bid for his 700 shares because now the security is below the level. X intraday is not a big trader. He is light. And he is risk adverse so he wants out if ABC ticks below 30. So X enters an order to exit.
The buyer has an algorithm dedicated to getting the best price for their client. If the algo feels a sell order for even a hundred shares at 29.99 it will drop out the bid and try and get the stock cheaper. So the execution will be one hundred shares at 29.99 and the bid will disappear from 29.99 and indicate for 5-20 cents lower. The algorithm will buy the stock at 30 but will also allow those who want to hit the stock below 30 to do so and accumulate stock below. The algo might get 100 shares at 29.99 and the rest at 29.83 on the bid.
Let’s say a few intraday traders are whacking below this 30 level. With this algo dropping out to get better prices a 29.83c fill is possible for the conservative intraday traders. After that happens your stop will go off. You, the swing trader, are out. The intraday traders are out. The buyer got his stock cheaper. And then the buyer will start going high bid again and resume buying at/above 30.
This new algo that is being used by more is a potential reason you are getting stopped out more.
Mike Bellafiore
Author, One Good Trade
9 Comments on “Why Am I Getting Stopped Out More?”
I use mental stops so I “nurse” my trades carefully and have seen this ‘trick’ so very often. Thanks for helping me understand what is occurring and why I have been shaken out more than once. I’ve also seen the reverse to force the hands of the shorts. Check out NVDA and yesterday’s prints at 25.05. Any shorts with hard stops at 25 covered as the offer lifted briefly above 25. LVS is also famous for a slight move above the whole number. Thanks again for the great post.
I’ve seen it too. Sometimes I feel like I should just put in limit orders where I think the stop runs will be. Then have massive patience to wait to see if the stop run happens. If it does not, then price will take off without you.
Scaling into pullback trades has helped me tremendously to get around the shakeout, snooky moves.
I agree w/ JCaldwell in ways such as putting a strict stop, however I learned to be more patient now days in regards to my entry, I might only risk 1/3 lot near heavy support for example, and put my stop definitely away from whole numbers, and quarter points. So for example if 30 is a strong technical support for a swing trade… which I do alot of them now days due to my schedule, then I would actually stop out myself at 30.3 or 29.97 for example. My reason is because if this is a strong stock with strong buyers, than it shouldn’t get to 30 in the first place. Now if i do get stopped out and position reversed, it wouldn’t hurt to go long at a slightly higher price say 30.27, it’s all about managing risk and get at least 1:3 risk reward in my mind.
Yesterday afternoon, TEVA found a buyer at $54.40. Large 1000 prints were going off and I kept buying at or a penny in front of it. I smacked out at .38. This time I wasn’t as gullible. I noticed that it barely went a nickel or so below and with no real volume. I purchased 2/3rds of my original position at .37-.38. $54.40 came back on the tape and I traded it up to $55.
I have a question, Bella. I’ve been seeing this a lot too thanks to you guys for pointing it out these past few weeks/months. In the instance above, did I do the right thing? Or should I have waited for the .40 buyer to show again. I bought .38 because I didn’t see a lot of meaningful prints below .40.
Thank you for this post =) I’m learning how to read the tape and blend it in with my chart reading and it’s been a joyous adventure. Keep posting. We’ll keep reading!
Jaynu
Yes, exactly! You described it perfectly. It’s what damages my account and confidence on a daily basis. Example: I buy 500 COH @ .03 the stock goes to .40 and in a blip reverses and it makes my stops below @ .95. When I see the ‘EGX’ market on the order flow I have a stomachake.
Jaynu,
Based on how you trade what were your options? How would you have traded this going forward?
Mike
is this that damn POS Algo in QCOM Today at 54.80 levels? What a pain in the ass…
Jaynu,
Based on how you trade what were your options? How would you have traded this going forward?
Mike
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Teva had a strong opening drive and prices were compressing. It had an intraday news catalyst: Teva Pharma moves closer to generic Lovenox approval – Collins Stewart (53.78 +1.11) -Update. Once I spotted a buyer, the play was pretty simple for me. Get long at or in front of the .40 buyer. If it dropped, get the heck out. .40 continued to hold and I got more long into my maximum position (1500 sh., was this too little for a 2-3 cent risk?) I ended up taking a small loss but rebought at .38 (2/3 of the previous position). .40 showed back up on the bids where bigger prints were going off again. What I should’ve done was added to this position. I’m still learning on how to add to my ideas. I also coud’ve held some overnight. One of my favorite scans is to look for stocks with a huge opening drive followed by afternoon consolidation. Even if I decided not to swing it, I could’ve done a better job following up with it the next morning where it ripped 2 points higher. These are a couple of things I could’ve done better.
Here’s another example of this that I want to share. Just yesterday on January 29 (I just had my best day, WOOT), I lost a lot of money and cool trading GG. Market was selling off on volume and I noticed GDX was rallying. I found GG to be best setup in the industry and so I watched. 41 held (pretty similar to the TEVA trade idea). I got about 1000 shares at 41.00 and was taken out at .95. Quickly traded back to 41 where I saw bigger prints. I got back in with an out at .94. Surprise, surprise. I’m stopped again with the low print of that candle. By the 3rd time I saw 41 hold again, I was too frustrated to give it another try and moved on to other stocks (which paid off). However, the stock did hit my target of 41.50 (previous day high where it sold off). If I were to do this over again, I would’ve saw the pattern of the 41 buyer dropping but quickly getting back to 41 (perhaps I could’ve bought those mid .90s and see how long it would take to get back above the whole). Also, I could’ve looked for a short from 41.50s. Hm, I didn’t see this until now =) Thanks, Bella.