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How to Tell if Hitting a Trade's Stop Means Go Again

Wednesday, 31 Aug 2011 | 11:36 AM ET

Despite your best intentions, some trades inevitably hit their stops - especially in these choppy markets. A MIM reader asked what do...so here's what I found.

Maybe you didn't expect Tuesday's euro slump when you bought the single currency, or maybe you thought the Bank of Japan's currency interventions would work when you sold yen. Maybe the choppy market just led you to put on tight stops. Whatever the case, sooner or later you'll have a trade that hits its stop. The key is what you do next.

Above all, "Respect your stop," says Rebecca Patterson, chief markets strategist for J.P. Morgan Asset Management, Institutional. "If a trade goes against you, you don’t double down and hope. Hope is not a trading strategy."

Marc Chandler, chief currency strategist at Brown Brothers Harriman, agrees. "The triggering of stop is your friend," It allows the losing trade to be cut," even when your emotions push you in the other direction. "Minimizing losses seems more difficult for people than letting profits run."

There will be times, though, when you feel strong that your reasons for the trade remain in place and other factors made prices move against you. When that happens, you can consider whether it makes sense to get in at a different level. Weekly data on FX futures from the CFTC can help you understand market sentiment, Patterson says, and most online trading platforms let you look at technical patterns.

If you do put on a new trade, Patterson says, "You always want to have more upside to your trade than risk. Your stop should represent a loss that is at least one half, and hopefully one third or more, of your potential gain, and you want to feel strong conviction around your odds."

One other point, especially important if your trade is short-term: "Look at a calendar to understand event risks," Patterson says. Be aware of any upcoming events - central bank meetings, data releases, and so on - that could affect your prospects.

And then - go to it.

This post was suggested by one of our readers. If you have ideas to share, get in touch at moneyinmotion@cnbc.com.

Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm and repeats on Saturdays at 7pm.

Learn more: The essential vocabulary for currency trading is on Key Currency Terms. Top currency strategies are broken down for you in Currency Class.

Talk back: Tell us what you want to hear about - email us at moneyinmotion@cnbc.com.

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