Trading Lessons 2 - Trading ranges without stops

Jul, 17, 2006     By Vikram Murarka    0 comments

Here is another trading story, again with Dollar-Yen as the background. Many Traders, especially in the early years, do not realize that there are two kinds of market - a sideways ranging market and a trending market. And unfortunately, there are often two kinds of Traders - range traders and trend traders.

Dollar-Yen ChartThis story unfolds in the first half of 1999. The Dollar-Yen market had stabilized after the fall of 1998. It had been trading sideways in a 7-big figure range between 117-124 from Feb-99.

Range Traders were busy making money hand over fist, buying low and selling high. The secret of their success was that few worked with Stops, because Stops have a habit of getting triggered in a ranging market.

But then, the unexpected (though inevitable) happened. Dollar-Yen crashed in July-99 to hit 115. A lot of the Range Traders were caught Long and wrong. Moreover, they did not have Stops in place. Worse, the market paused a bit after hitting 115. Many Traders thought the market was going to rebound and doubled/ tripled their Long positions, again without Stops.
Oh misery! The market resumed its fall, refusing to stop till it hit 105. It was later heard that one particular trader, who had been the toast of the market when it had been trading between 117-124, had been eased out his job and had quietly left the country.

Moral of the Story:
Work with Stops, always. Your stops may be wide; they may even sometimes be mental. But, be disciplined and implement your Stops when the Stop Loss levels are triggered. Otherwise you are committing trading hara-kiri.

Vikram Murarka

Chief Currency Strategist at KSHITIJ.COM. Likes to look at the markets from many different angles. Weaves many conventional and unconventional technical analysis techniques and fundamental analysis into a global macro perspective. Likes to take the road less traveled.

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