This is a post I posted in a trader's log. I'm reproducing it here (with some improvements) to start a thread about discussing potential disasterous pitfalls and how to avoid them. I'd be interested in anyone's insights.
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One of the biggest reasons I put it hard stops and targets is because you never know when your computer or Internet is going to go down. This happened to me just the other day. I had been having problems with the Internet slowing to a crawl so that TradeStation was affected.
I was short soybeans when the Internet quit on me. Fortunately I had my bracket orders in, so I wasn't too worried. I was getting enough information to know the trade was working out but I was getting no updates on whether my targets had fired. The screen was showing them still live, even though price had moved below them. I called the TS desk and the guy there told me indeed my targets had been hit and I was out of the trade.
Now here's the nightmare scenario. :nahh:
On a bright Friday morning, with hope in your heart and profits on your mind, a buy signal fires and you go long 5 YM contract at 13000. You enter no hard stop, however. Rather you decide to use 10 point "mental stop." Your target is 13020. If the trade works out you will gross $500, with a risk of only $250, a nifty 2-1 risk reward ratio. That's a somewhat bold, but not too risky 1% risk on your $25,000 futures account.
You settle into your chair to watch the trade. It moves your way a bit, inching up to 13010, but then turns around, dives past your entry and hits your mental stop loss at 12990. You hesitate, hoping it will turn back up, but it drops another 5 points, an additional net loss of $125. Now you are getting scared. You reach for your mouse to close out the trade, but you screw up the order and accidently
buy 5 more contracts, and are now long
10 contracts. YM drops another 5 points. Now it is down 20 points from your entry, and you are down $625 on the trade. You scramble to close out the trade but your heart is now pounding and your adrenaline is pumping. You fumble to change the number of contracts to 10, but your sweating palms make it difficult. YM drops another 10 points and you are down $1125.
Finally you move the mouse to the sell button. But the mouse pointer won't move. Your computer has frozen! Panic-stricken, you reach for the reboot button. While your computer is booting you turn on CNBC. The Dow is down even more. You figure down 40 points since you entered the trade. You now losing $500 dollars for every 10 point drop, so now you are down $1625.
Your computer finally reboots and you re-open your trading platform. Your trembling hands type in your username and password and click Logon. Nothing happens. "Cannot find server," your platform informs you. You open up a web brower, but it cannot find your home page. The Internet is down! You glance at the television. The Dow is down another 20 points and you are in the tank for $2625, over 10% of your account.
You decide to call your broker to close out the trade. Where's your cell phone? That's right, you left it in your bedroom. In full-panic mode you rush upstairs, but not before checking the news. Dow down another 10. You're loss is at $3125 and dropping. Upstairs you grab your cell phone and open it. Nothing happens. The battery is dead. You let out a blood-curdling cry and bolt downstairs for the land line.
When you get there you reach for the phone receiver so hard you knock it across the kitchen, breaking it. Fortunately, your phone base has a speaker phone. You press the button and gasp with relief when you hear a dial tone. But you can't recall the broker number. When you wanted to call them before you just looked up the number on the Internet. But it's down. Just then your dog trots into the kitchen, sits down and regards you with a strange expression. You turn away from him in embarrassment.
After some calls to long distance information finally you get the broker number. But since it is the general number it takes more time to get ahold of the trading desk. Then you have to use your social security number for them to find your account because you can't remember your futures account number. In the meantime, the Dow drops another 35 points.
Finally, you get the broker to close out your trade. He sells your YM contracts at 12895, 105 points from your entry. On one trade you've lost $4875, 20 times your planned risk and 20% of your trading account.
All because you didn't enter a hard stop. (And were unprepared for disaster in just about every other way.)
Can't happen? I'll bet something like this happens just about every day to somebody out there.
When electronic trading always enter a hard stop and, better yet, always send a stop OSO order along with your trade order to guarantee if your trade is executed your stop will be in place.
For that matter alway have a fully-charged cell phone with your brokers trading desk on the speed dial. Keep your account number written down and handy.
Gary