Lesson 33: Mrs. B raises her stop/loss order

When we left Mrs. B in lesson 31, she had just made the following decision,

After Mrs. B had clicked to send this email to Emma, she took the following action on her own behalf. She called her own commodity broker and gave her broker this order,

"Buy 1 contract of July Soybean Oil futures for me the next time July soybean oil futures close at 15.82 or higher. When this happens, enter a stop/loss order for me 50 points below my purchase price. Then give me a phone call letting me know at what price my purchase order filled. Once I know my purchase price and the price at which my stop/loss rests, I will let you know what my profit/exit order will be. Don't forget to phone me once you know that my buy order has filled."

On the date of February 28th, 2001, Mrs. B's order filled. We will assume that it filled at the closing price of July soybean oil on that date, 16.28. Since Mrs. B is not a real person and there was no real order the only item correct in the second sentence in this paragraph is the fact that the closing price of July soybean oil on February 28th, 2001, was 16.28.

Once Mrs. B was long July soybean oil at 16.28, her commodity broker entered a stop/loss for her 50 points below her purchase price or at the level of 15.78. This is a risk of $300.00 not including any slippage (which almost always occurs) and commissions (which always occur). It would be reasonable to assume that Mrs. B's risk is closer to $400.00 than $300.00 and it could even be above $400.00 should there be a limit-down day (or days) in which the market moved below 15.78 and did not offer Mrs. B the opportunity to sell at or around 15.78.

For the sake of our hypothetical trade, however, we will assume the following (all of which could have happened in the real world in the months of February and March, 2001),

1. Mrs. B is long July soybean oil at 16.28.
   
   
2. Mrs. B has a stop/loss at 15.78/STOP.
   
   
3. Emma is long July soybean oil at 15.82.
   
   
4. Emma has not yet placed a stop/loss order.
   
   
5. On March 13, 2001, July soybean oil closed at 16.78.
   
   
6. Mrs. B has an unrealized profit of 50 points or $300.
   
   
7. Emma has an unrealized profit of 96 points or $576.
   
   
8. Mrs. B stop/loss order at 15.78/STOP was not hit after her order filled on February 28th and the current date of March 13th. Mrs. B remains long July soybean oil.
   
   
9. Emma's stop/loss order has never been hit because Emma does not have a stop/loss order for her position. Emma remains long July soybean oil.

 

On March 13th, Mrs. B decided that it was time to raise her stop/loss order in an attempt to reduce her risk of loss on this trade. Note that raising a stop/loss order does not guarantee that the risk of loss will be lessened because price may always move through a stop/loss order, possibly move limit-up or limit-down, and the eventual loss may be greater than the loss that might have been predicted based on where a stop/loss order rests. However, it is generally true over a series of many trades that if a trader is long, raising a stop/loss order will expose a trader to a reduced level of risk should a stop/loss be hit at both its initial level and its raised level.

Mrs. B has an unrealized profit of 50 points. She has a stop/loss order sitting 50 points below her entry price. She decides to raise her stop/loss order from 15.78/STOP to 16.28/STOP. The result is that her stop/loss will now rest at the same level as her entry point. In a perfect world with no commissions and no slippage, if Mrs. B's stop/loss is hit at 16.28 and she sells at 16.28 with her purchase price having been 16.28, Mr. B would exit the trade with no profit and no loss; she would in essence 'break-even' on July soybean oil. In a not so perfect world (the world we actually live in), Mrs. B has probably reduced her risk of loss on this trade from $400.00 or thereabouts to $100.00 or thereabouts, assuming her stop/loss, if it is ever hit before her profit/exit order is hit, results in her exiting the market somewhere in the 16.20's.

The order Mrs. B gave her broker to raise her stop/loss from 15.78/STOP to 16.28/STOP was something like this,

"Sell l contract of July soybean oil 16.28/STOP, GTC (the stop order remains open and good until either filled or cancelled at a future date), cancel former order (CFO) to sell l contract of July soybean oil at 15.78/STOP, GTC".

Mrs. B has now purchased a contract of July soybean oil at the price of 16.28. She has a stop/loss order resting at 16.28/STOP. The price of July soybean oil on the close of March 13th, 2001, is 16.78. Mrs. B has an unrealized profit of 50 points. Not including commissions or slippage, Mr. B is ahead $300.00 on her soybean oil contract. She has held her position approximately two weeks. What she needs to do now is to enter a "profit/exit order" for this trade. She needs to decide at what price she wishes to take her profit by selling her long position. That is what she plans to do in the next lesson. In the meantime,

To order a set of 41 price charts for July soybean oil futures for the years from 1960 through 2001 along with the personal notes, annotations and comments made by Bruce Gould on each chart so you can learn exactly why Mrs. B decided to go long July soybean oil after receiving Emma's email click here.

To view a current Soybean Oil chart click here.

To send Mrs. B by email any thoughts you might have about whether she has selected the right level to place her stop/loss order, click here or on her mailbox.

After ordering your set of 41 charts, taking a look at current July soybean oil prices and after sending Mrs. B your thoughts on her stop/loss order placement, proceed by clicking here.

 

Bruce Gould