Yeah you're right. I'm looking at volume and it vacuumed lower. Stop fills would have sucked for sure. There's a big gap in the volume between 1240 and 1232, looks like that's where some responsive buying came in. An $8.00 stop certainly would not have been pleasant.
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I would not trade without a stoploss. When I manual trade, which is rare as I am too emotional I always use a stop. My auto strats always have a stop and the strats that have a larger tick target all have some sort of breakeven after so many ticks. Nothing like getting one tick away from the target and then getting a full stop filled. Others are different, but this is what works for me and what makes me sleep good at night, well not lately, broker issues kill my REM cycle.
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I'm not advocating anything except to do your own thinking and research. It comes down to this: do your stop losses actually help your bottom line? If, after a review of your trades, you estimate that the net gain is greater (or the net loss is smaller) with your use of stops, then they are benefiting you. Otherwise, they are not.
Most people do not have a reason behind using them other than when they first opened a trading screen, someone told them to always use stops, so that's what they do. Even after months or years of getting stopped out near the low or high, they still robotically use them. Of course they prevent greater losses in some cases. But the main issue with using stops "just because" is that you give your market, whatever it may be, control over your trade. Some will say this is a good thing, to "let the market decide when the trade is no longer valid." But the trader still puts the stop in, so he's still deciding, not the market, except that with the stop, he has zero control over the price he gets.
Many will find that for every 10 point loss they save themselves from by having a stop in place, they have five other trades that got stopped out for losses that would have worked just fine, or at least could have been salvaged close to breakeven, had there been no stop in the market. How many times have you stopped out, only to look later in the day and see that you were pretty close to the low/high of the day? If you feel anxiety as the market approaches your stop, realize that others are probably feeling the same thing; and when you see a big surge in volume, it's when all the saps collectively feel the pain as their stops are hit, with some of course manually exiting, and all usually before a nice bounce that would have let them out at a respectable price.
It can be hard to recognize genuine selling pressure from shakes of the tree. But look at s&p's this morning. It opens above a 2-day range, sells off, and stalls an hour in, near the middle of that range. How many people bought there, and then writhed in agony as their position went in the red 7 handles, and stopped out just below the 2-day low because they wanted to limit their loss with a stop below the prior low? The context of everything going on would say that today is not going to be a "crash" kind of day, yet I guarantee that quite a few people got stopped out at a predictable place because they put their stops in, like good little traders. Likewise, I'll bet quite a few overnight ES shorts stopped out 3 handles above the 2-day high overnight, only to see it go back down in the morning, because they were afraid of a big move up overnight and put their stop at their pain threshold above the prior highs.
The thing is, these mini crashes bounce back up. "What if it doesn't?" Well, hopefully you aren't leveraged to your eyeballs, and don't have all your eggs in one basket. Maybe even an offsetting position of some kind, or a hedge, or diversified positions, or an option, or... etc.
Finally, to be clear, I don't care whether anyone else uses stops or not; I'm just highlighting how they can be harmful if used foolishly. You can bet that if the market will make a move against me and I think it's become a bad place to be, I'll get out. I'll get myself out, because it's my trade, and I make the choice, good or bad. But I won't put a stop order where every other Joe Schmoe has theirs, and sell the low tick. I've done enough of that crap before and refuse to be on that side of that deal.
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I also might add that I test my stops extensively before I implement them in my strategies, which plays into what Josh is saying. As there is typical levels where it bounces.
I have trend strategies that have 19 tick stops and then on the same entry a separate medium target strategy that is half of that. I also test when to move my stop to breakeven as moving it too soon is worse, in my opinion, than having your stop to tight. Nothing like making ten dollars on a trade that would have been a thousand. If you use trailing stops, don't have those too tight either.
This is what works for me and I test it extensively on past data and hope that it works most of the time on future data. Nothing worse than missing good trades and by missing the good trades, as Josh states, you will see a greater draw down.
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