It essentially means moving your stop loss to your entry point. For example lets say you enter a long position at 100 with a stop loss at 80 and a target of 120. If price then moves up to 110 you may consider moving your original stop which was at 80, to 100 ie: Break even. This means that if price were to drop back to 100 which is where you entered, you would be taken out of the trade at the same price as what you entered (obviously not taking slippage and commissions into account)
It is a means to take the risk out of your trade.
Keep in mind this is not necessarily a good practice, even though it may initially sound like a good idea.
You donít trade the markets; you only trade your beliefs about the markets.
- Van K Tharp
The following user says Thank You to DarkPoolTrading for this post:
Thanks. I should have mentioned that I am practicing trading with 2 contracts. So to use a realistic number on the ES, if I buy two contracts at 1600, and I sell one contract at 1601.50, I moved my stop to break even on the remaining contract; this would mean I move my stop from 1599 (my original stop for both contracts) to 1600. In this case, I come out ahead, right? Based on my calculations, (not taking slippage into account), I would make $75 on this two contract trade if, in fact, the second contract did get stopped out at 1600.
Basically yes, moving stops to BE do have their benefits more so if you have already exited half and are looking to protect or lock in the gain but as I have found lately these BE stops can be as much a hindrance than a help. Even at 1599 without slippage you are still coming out ahead and it gives you a little wiggle room to let the trade pullback a little and retest the entry then possibly move positive again.
Whilst you practice/study I would recommend tracking the different results between moving your stop to BE and leaving it at initial placement to let the trade stretch out a little more.
Hope I make sense
The following user says Thank You to Gozilla for this post:
I see, thanks. I think the idea of moving the stop to break-even is applicable when using 1 contract. But with two contracts, if I move my stop to my entry price after exiting my first contract with a 6 tick profit, then I am not breaking even in the literal sense. I come out ahead in this scenario. That's what I have been confused about, i.e., the terminology of "break even".
Ask your self, what is the risk to reward on the above trade? Is the reward greater than the risk? No, the risk to reward on this trade is 2:1.5. A risk of 2 for a reward of 1.5.
Yes a profitable trade but not a winning scenario.
I trade using a similar style to what you describe. Here is the scenario I believe you are doing:
Buy 2 contracts at 1600.00
Sell 1 contract at 1601.50
So you have banked 1.5 points profit and then move the stop on remaining position to the point of entry. If this stop is hit you still make 1.5 points on the first contract and 0 on the second (minus commissions). But depending on your method and entry point, you may or may not have a high probability of the stop on the second half getting hit. For me, even if I'm with the trend, the ES can hit my first target at say 1601.50 and still come back and test my entry at least once before continuing.
I like to think in terms of theoretical average or entry. So once my first target is hit, my effective remaining position can be thought of as 1598.50 (original entry price minute profit from first contract). This is the point where my combined profit on the first contract and loss on the second represent a break even trade (minus commissions) in my mind.
So if I keep the stop on my last contract anyplace higher than 1598.50 I have what I effectively consider a scratch or free trade. I can try to let the position run with the trend. You will have to decide for your system if this style would help you get more profits on the second half or just give back some profits from the first contract. I find if I'm right about the trend, I'll get more points on the second contract. When I'm wrong.... I'll have a scratch trade with little to no profit.
Hope this helps.
Trade Wise, Trade Well
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