Editor’s Note: Tomorrow evening, our colleague, Jeff Brown, is putting on an event that he says is four years in the making… The Biotech Moment.
The biotech winter has been raging on for four years. But Jeff says a historic convergence is happening in the industry right now… and it will trigger a “golden age of biotech.”
Already, small biotech stocks are soaring 25%… 108%… 256%… 453%… and even 850%… in a matter of hours.
Jeff believes this convergence could trigger the biggest gains yet. So, to make the most of this opportunity, he’s created an AI trading system designed to spot these fast-moving stocks – before they soar.
He’s revealing all the details tomorrow, July 1, at 8 p.m. ET. You can go here to sign up with one click to join him.
Most traders are familiar with the rise of algorithmic trading.
From high-frequency firms executing thousands of trades every second through to sophisticated hedge funds exploiting tiny pricing inefficiencies, algorithms now account for a huge percentage of daily market activity.
But while retail traders might be familiar with some of the more common algo strategies, there’s one less obvious tactic they often overlook. And that can leave them exposed.
This strategy looks to exploit where large numbers of traders are likely to have placed their stop losses.
But if you follow some simple guidelines, you can greatly reduce the chances of becoming part of the herd.
The importance of using stop losses is drummed into us right from the moment we start trading.
And for good reason… A stop loss gives us a clearly defined exit point if a trade goes against us. It also helps prevent a small loss from turning into something much bigger.
But the problem isn’t the stop losses themselves… It’s where we place them.
The simple truth is that traders often place their stop losses around the same obvious technical levels. And that’s exactly where institutional trading algorithms expect to find them.
For example, if a stock had held multiple times at a key support level (say $100), you could expect a swathe of stop losses sitting just below that level (say $99.50–99.90). The rationale is simple: if the price breaks below support, then the trend may be changing and it’s time to exit the trade.
Another common level is the 200-day moving average, which many traders use to depict the long-term trend. A decisive break below that can also trigger a wave of stop-loss orders.
These are situations where the algorithms get to work.
When prices begin trading through these obvious technical levels, the algorithms know a large number of stop-loss orders are likely waiting. As those orders become market sells, they add further selling pressure, often accelerating the move lower.
Once that wave of forced selling exhausts itself, you’ll often see a short, sharp recovery as bargain hunters enter the market looking to profit from any bounce.
For a trader, there’s nothing quite as frustrating as getting stopped out, only to watch the stock quickly rebound.
Fortunately, there are some simple ways to reduce the chances of that happening.
One strategy is to use a slightly wider stop level. The key, however, is not to increase your risk. That means trading a smaller number of shares while giving the trade a little more room to breathe.
So, you might place your stop below that cluster – around the $98 range, for example. The idea is to position it beyond the area where many obvious stops are clustered, while reducing your position size accordingly. So, your overall risk stays the same.
Another strategy is to use the Average True Range (ATR), which measures how much a stock typically moves over a given period.
Instead of placing your stop at a fixed price level, you could set it at, say, two times the stock’s 14-day ATR below your entry price.
Because the stop adjusts to the stock’s normal day-to-day volatility, it’s less likely to sit alongside everyone else’s stop orders.
Similarly, you can use Bollinger Bands, which are typically set at two standard deviations of price data above and below a stock’s recent average price.
Rather than using a fixed stop price, you could choose to exit if the stock closes below the lower Bollinger Band. Again, you still have a clearly defined exit strategy without placing your stop at one of the market’s most obvious levels.
There are also time-based stops, where you automatically exit a trade after a predetermined period regardless of price. Put simply, if the move you were anticipating hasn’t panned out by that time, then it’s time to move on to the next trade.
As you can see, there are a number of approaches you can use.
At the end of the day, successful trading isn’t just about finding good entries. It’s also about intelligently managing your exits. And by avoiding the obvious stop-loss levels, you give your trades more room to work – and reduce the chances of being shaken out of a trade right before the move you were expecting begins.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
