Ask Colin

Should I have special stop rules for large sudden market falls? 

The detailed question was:

I have been working on a trading plan for the last 12 months, and had all the major elements worked out. Then, on the morning of the 11th of September (following the catastrophic events in New York) all my positions opened below their respective stop losses. My trading plan had no contingency to deal with events such as those that transpired on the 11th of September 2001. Needless to say that the next few days were gut wrenching as decisions had to be made to deal with the situation. The saving grace was that I only had 20% of my trading capital exposed at that time (as that part of my plan which dictated total exposure to the market according to market risk).

1. Could the events of September 11 be an exception to the strict discipline of ruthlessly exercising stop losses (as part of a trading plan to deal with
these events)?

2. How does one build a trading plan for these situations?

Stops, whether stop-losses or protect profit stops are there for only one reason - to protect us from catastrophic losses in a waterfall decline. When our stop is hit, there is only one response - act on it immediately.

That is how we deal with specific risk. Market risk is dealt with through our market exposure strategy. I note that you did this quite well with only 20% exposure.

So, September 11 is not an exception - it is just what the stops are for.

The trading plan deals with such situations through Market Exposure strategy and stop tactics. It sounds to me as though you have it in place. You just need to follow your own plan. As they say, in the market "sometimes shit happens". The trick is to get it off you and carry on as quickly as you can. Protection of capital is your paramount objective. Profits are well behind that.