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Avoid Stop Orders to Stay in the Game!
Most swing traders utilize the traditional strategy of buying or selling futures contracts at support and resistance levels, respectively, with the use of stop loss orders for risk management. However, I believe the use of stop orders is deeply flawed. Markets have a tendency to cause the most pain to the most people, and that often entails bouts of stop loss running before trend reversals. Nonetheless, there are ways to alleviate the wrath of stop running to give your trades lasting power.
As an alternative to a stop order, traders can effectively purchase insurance against their price speculation in the futures market using long calls and puts. For instance, by definition a put option is the right to sell a futures contract at a specific price (the strike price), at a specific date in the future. Therefore, the purchase of a put option with a strike at or below the entry of a long futures contract is essentially limiting the risk of the trade to the amount paid for the option, plus any gap between the futures entry price and the strike price of the option. Let's take a look at an example....