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Platform: "I trade, therefore, I AM!"; Theme Song: "Atomic Dog!"
Trading: EMD, 6J, ZB
Posts: 796 since Oct 2009
big moves, inability to get out or take the out-size profit, when it goes in you favor,
one essential key to staying in this futures trading game long term are using defensive targets and stops,
this is essentially the same issue of buying 3 cars (for example) and scaling out...
1) it guarantees a lower average cost, when you start scaling and getting filled
2) it allows you to walk away and live for another trade
3) it cheats you of a larger, more consistent profit for all 3 cars, if one simply just held,
4) it cuts risk as you proceed
a number of trading schools are loathe to allow this discussion to proceed, so, its appropriate for a forum like this,
but in most classes, this concept of naked orders are heavily discouraged...but then again, at this point, I'm only being repetitive...
Can you help answer these questions from other members on NexusFi?
So where would do put a "holy crap" stop? Would it be different from day to day depending on the action at hand? Because to me without a systematic way of accounting for the risk at hand, you will always be looking over your shoulder wondering if it really needs to be that far out.
To me it still seems that trading without a stop is a solution to not having a strong grasp on the risk at hand. Which again, imo, the only thing that really matters.
"Watch the costs, and the profits take care of themselves." - Andrew Carnegie
"Where you want to be is always in control, never wishing, always trading, and always first and foremost protecting your ass. That's why most people lose money as individual investors or traders because they're not focusing on losing money. They need to focus on the money that they have at risk and how much capital is at risk in any single investment they have. If everyone spent 90 percent of their time on that, not 90 percent of the time on pie-in-the-sky ideas on how much money they're going to make, then they will be incredibly successful investors." - Paul Tudor Jones
There are also big moves that can happen and be over in the blink of an eye, like the Flash Crash of May 2010 and several mini-crashes since. Having an emergency stop on those days is very costly.
That said, everyone should trade with a stop. If you don't trade with a stop, then you better not complain one word when something happens because you made the decision to trade without the net.
Stops are essential; whether mental,but not deviate, or set on the new position. I am a simple 'retail' trader.
I have just eaten one on ES 143775 as I am writing/posting.
Your point re Crash of May 2010...I remember it very well. I took a few days off because nobody in their right mind could have traded efficiently through that period; not unless they had absolutely no respect for their capital as it was ,essentially, an unmanageable market.
From what I read from from this thread and others, it would seem many think "too hard" instead of simply having faith in their consistant trading strategy and letting it happen.
I may be wrong...have been many,many ,many times before....
this is an interesting discussion. i have been questioning how i use stops lately so this has given me food for thought. one thing that a stop can do that is counterproductive is avail you of the responsiblity of managing your trade. It can give you an excuse to stay in the market when your trade is clearly not doing what you anticipated - like 'oh, I have a stop so maybe I'll just wait even though this trade is not really working'. I traded with that guy don miller in one of his classes and he never placed a stop. You may remember he gained notoriety when he made 1.6 mill trading the es in 2008. Those were some of the most volatile markets anyone has seen and he never placed a stop even though he might have 75 contracts on. He did what he called 'controlling risk with size' - he would just get bigger or smaller depending on how much risk he felt there was to his position.
Personally, I don't feel there is a great risk of catastrophic losses when not using a stop as long as you are paying close attention . Markets usually show you your trade is not working before they go too far against you, the danger lies in personal management.
Seek freedom and become captive of your desires. Seek discipline and find your liberty. - Frank Herbert
Depends on the size of the position and what a worst case loss would be...
I would suggest that there are many ways that risk can be minimized, as there are different types of risk.
A stop in the market only really protects against what some might call "event risk" (I know there are more well-defined names) -- the risk that Iran launches nukes, or that a buy program goes haywire, or that the internet connection dies phone both die at the same time while some event occurs (again, I'm sure there are more granular ways to define these types of risk but I think we can umbrella them together for our purposes). This is why I think that regardless of one's take on things, some catastrophe stop at least should be in the market.
The first way that risk is minimized, IMO, is by getting the direction of the trade "right", and by having good trade location for opening a position ("good" being based on future, yet unknown, market behavior and direction), neither of which have anything to do with a stop. In the event that this risk is not minimized, i.e., location is bad or the direction is just flat out wrong, then a trader can just as easily close the position manually. This is no less dangerous (notwithstanding event risk mentioned above) than having a stop in the market. A trader who will let the trade go way against him without a stop, ignoring risk principles, will just as easily move the stop (probably all the way until the market reverses just after hitting his stop) and ignore risk management this way. The only way this can be truly prevented is if there is an external force (a manager, a brokerage, etc) who closes a position without consent of the trader.
I appreciate very much these quotes. Last week I had a day where I did not manage risk well, and paid for it. However, it had nothing to do with stops (in fact, the loss would have been much lower without them). I keep a journal where risk is my #1 metric. I have not yet captured trades in October, as I have been behind working on some other things, but here are a couple of portions of the main page showing the last 2 weeks in September. I post this not to boast on the results (as my PF is usually closer to 2.5, and last week I actually lost money), but to demonstrate that I appreciate the value of risk management (while still failing to adhere to it sometimes, like last week which is not reflected in these stats).
My contention, as the above should make clear, however, is that I do not equate stops with "normal" risk management, in day-to-day operations. As I mentioned, I think a stop always has its place for the fat tails the market throw at us from time-to-time.
The question we all have to individually ask ourselves is this: does using stops in a traditional way help or harm our bottom line, taking all factors into consideration? Are people who are advocating using stops or not using them, themselves profitable on a consistent basis, with real money? I'm sure some people from both camps are quite successful, and some are not.
Conversely, if you trade a fast market, like CL, which tends to have episodes of moving hundreds of ticks in 60 seconds, on sustained moves which do not always snap back, not having a stop could be disastrous, before a trader even has time to react.
I remember when Globex was launched in '92, many thought it might not "catch on," most traders only used it to clean up trades from the regular session. I think it was like the first time we typed our credit card numbers into our computers and sent it off into cyber space, trust was an issue. But with the deregulation of markets and mass marketing, one by one we cinched up our jock straps, opened online accounts, down loaded platforms and trusted the world not to hack into our accounts and steal all our money. There's a lot of moving parts, and a lot of lines of code between my mouse, my market and my account. Everyday I (we) trust that all those pieces will work, flawlessly. I find the most interesting part of the equation is, nobody can guarantee any of it will work at all! But we still do it.
I think it's a trust issue, I usually put a stop in the market so deep that it never shows up on my DOM and leave it there all day, I don't trade from the chart so I don't see it there either. I have had hardware failures and had to call in to get flat, but in those situations I wasn't freaking out that a flash crash may occur within the few minutes it takes me to close out my orders.
I also believe like you mentioned, "the visual presence" can indeed "cause one to take his focus off the market's activity." I've never traded on the floor but I would assume the real 'cowboys' could see where other traders mental stops where by watching/hearing the emotions or body language of the other traders, I think what you describe is quite similar. It's like driving down the road with an idiot light on in your car, you know you should stop immediately but who among us hasn't tried to get to the next exit, sometimes at great costs.
One last thought, I think many (most) brokers have just been jerking off for the last twenty years, and remain focused on churning commissions from the 90%. I find it hard to believe, maybe even incredible that we have to put our broker's "nuts in a vise" just to find out if the orders we place are actually at the exchange or sitting right here on my little computer a thousand miles away from the action. I assume it has to do with cost, but I cannot understand why this, after 20 years, is still an issue. I hope we begin to see some new "out of the box" concepts in trading platforms, most of us are using 20 year old technology as we try to compete with firms that have IMO, unlimited resources.
I wanted to incorporate this as an example of how vulnerable we are when we do what we do, even the big guys make mistakes, (or was it intentional?).
This was from the 10-09-12 session Today’s confusion around the 10-year Spanish benchmark was an example of how easily investors can be spooked by unexpected announcements from Europe. The EUR/USD dropped nearly 100 pips at the start of the London trading session when Bloomberg Terminals showed an incorrect Bund/Bono spread. This was quickly corrected but left a lasting impression on the EUR/USD, which failed to recapture its losses.
I look at risk from a time in the market perspective. I believe @josh said something like 30 min to 4 hours for his trades.
My bot swing trades (average trade is about 3 days but ranges from same day to 10 days) with only a time stop, no price stop. I know what kind of damage can be done in the 3 days before the time stop check. If my bot goes long and the market goes straight down for 3 days say 10-15% total, its effect on my account would be at the edge of my tolerances. Would suck if it happened, but I know it is possible. That is how I evaluate my risk.
If you wanted to you could calculate your time risk based upon certain market characteristics and place a price stop there. You would never want to see it hit, but it would remain part of your risk profile.
as I am writing/posting.
