Trading Tip #9: The Double Stop Reversal
Stop orders are often used to try to protect profits. Take the stop order to another dimension and use it to reverse your position and open another trading possibility!
When you place a stop order, it is only activated if the market trades at or through the stop price. These stop prices are often key technical levels.
If the market is breaking an important technical barrier, why not double the order and try to play the movement?
Daytraders can use this technique to play trading sessions with wide ranges. Position traders can use the double stop in wider parameters, and target areas of historic support or resistance.
Let's run the typical stop order scenario. A trader puts in an order to buy a contract. They are now long. They place a stop loss order below their entry price, usually at a key technical level. If the market moves higher, they are seeing a gain on their position. If the market moves too low, it will trigger their stop and close the position with a sell order.
If the sell off in the market was triggered by bad news or it was the result of a trend reversal, what better moment could there be to reverse a position? This sets up a new potential trade opportunity if that stop level was based on a key technical area, rather than a simple point-based risk level.
Run the same scene with double the stop order. When the market moved lower and triggered the sell stop, if it was two sells instead of one, the trader would be short one contract, positioned to play any continuing downside move.
When a market breaks a key technical level, it might be signaling the trend shift and indicating that the opposite position should be played due to the momentum likely to carry forward the market from the technical break.
The use of stop loss or contingent orders may not limit losses. Certain market conditions may make it difficult or impossible to execute such orders. Prices may gap through the stop price.
Take a look at this example of a double stop in action:
See image at : http://tradingadvantage.com/lp/tradingtips/images/combined.gif
Past performance is not necessarily indicative of future results.
When you place your new stop after the double stop is triggered, look for those areas of previous support to become the new levels of resistance and vice versa. Use these as a possible guide for your new order placement. Aim just outside these levels so there is sufficient room in case the market retests that area.
Double stops can be used in moments when a trend might come to an end or the market may be poised for a reversal, like those that follow key economic reports.
Using a double stop order is a way to take advantage of the market sentiment that is taking out your original position. It is just one way to try to play a breakout or reversal. This is a technique that can be employed when unknown factors come out into the light or when the rumor becomes news and is contrary to market expectations.
Best Trades to you,
Founder & President- Trading Advantage