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
"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,
- Mrs. B is long July soybean oil at 16.28.
- Mrs. B has a stop/loss at 15.78/STOP.
- Emma is long July soybean oil at 15.82.
- Emma has not yet placed a stop/loss order.
- On March 13, 2001, July soybean oil closed at 16.78.
- Mrs. B has an unrealized profit of 50 points or $300.
- Emma has an unrealized profit of 96 points or $576.
- 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.
- 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
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.