Case Study, Mei: Trading the News and Missing the Stop

[Fairman]

Case Study, Mei: Trading the News and Missing the Stop

Mei is a composite character. She trades the first minutes after major data, with a planned stop of 10 pips and a target of 20. Her records show that on news trades, her stops fill an average of 17 pips from entry, because of slippage and wide spreads. Her targets fill as planned, 20 pips, about 40 percent of the time.

Compute the plan versus reality. Planned: 0.4 times 20 minus 0.6 times 10, which is 8 minus 6, plus 2 pips per trade. Actual: 0.4 times 20 minus 0.6 times 17, which is 8 minus 10.2, minus 2.2 pips.

The slippage alone, 7 pips on each loser, turned a positive expectancy into a negative one. On 0.5 lots at 5 dollars per pip, the difference is 4.2 pips times 5, which is 21 dollars per trade.

Add the spread. On news, it may widen to 4 pips, which affects both sides. Her entry costs add another 4 pips against her. The result is much worse.

Possible fixes. Wait 5 to 15 minutes after the release, when spreads normalize, and trade the developing direction instead. Use smaller sizes, accepting that the stop may fill beyond its level. Use limit orders where possible. Or stop trading news.

What is the evidence for each? Track fills over 30 news trades and compare.

Lesson: planned risk and actual risk differ most when markets move fastest, and the strategy should be judged by actual fills.

Exercise: compute your average stop fill distance on the last ten stop-outs relative to plan.