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STOPS are Frustrating (SL) take or not to take
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STOPS are Frustrating (SL) take or not to take

  #111 (permalink)
Chicago, IL. USA
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cme4pif View Post
In advance I am sorry, I am new to blogging and it might be an offence to post the same message twice, but I don't know how to quote my other thread.

First off I like to sleep at night, so if you are a new trader don’t misunderstand this as a license to go out on a high risk long with no plan and blow your account out. Many very profitable traders are big on stops and so you should know there must be some wisdom there. Please treat this post more as an intellectual exercise.

There is this really important idea that casinos don’t make their money based on the “edge” of the game but in fact do make there money based when the player runs out of money. Dr. Tharp and Ralph Vince talk about the risk of ruin even in a game 60% in your favour.
Here is a copy found all over the net:

What this says is that a casino would still win even in a 50/50 game like coin toss.
Also in effect it says if you built an automated trading system that can win 60% of the time, if it bets a big part of your account, it will still blow up your account. We know this as getting through a drawdown.

That really came home to a trader with a bunch of trailing stops during the “flash crash”, that was the ultimate run at the stops.

All that is nothing new . . . but I have been thinking that a stop loss is a little bit like a mini blowing up of your account. You can build almost any automated trading system you like and if you introduce a stop loss in your back-test you will usually get a lower overall return. That really gets to me, because using backtesting and computers it becomes clear that the common wisdom of always use a stop is not good for your return. (Of course you can place your stops so far out they almost never trigger, but that is just about like no stop at all.) Stops are like the gambler who must stop vs the house that does not have to stop. Of course the ultimate stop is blowing up your account.

In the bigger picture, if the market were full of traders with stops and many other traders with under-funded accounts, it would cause the market to drop faster than it rises, a phenonium we do see in the markets. Like a casino, a draw-down or string of bets loosing means the player must quit, this would cause funds to transfer from the player to the “house” or in the market the better funded pros with better risk management feed on the small speculators. You can also say new money comes in to the market, but it just bounces around, until someone losses and steps away from the table. Fear and greed come in again. The amateurs would give up on the market just when they should buy. The old floor traders used to say, when you feel like you want to puke on your shoes, it’s probably time to buy more.

I recall years ago learning a fascinating idea that a stock with a big “short interest” can rocket up if the shorts get squeezed and they all must cover. Imagine the emotions of someone with a great short but the stock rises anyway (like Netflicks last year). They must feel just like the guy in Vegas when his ATM card says no more money for you. At some point you reach a pain threshold, margin call or just go broke. In a way, it is at this point your money is released back into the trading system. This happens not just to one trader but thousands at once. When the selling pressure is finally off, the stock must do something and when you are all out of sellers that something is the stock goes up in value.

I have thought about how you trade this, and it begins to sound like old trader wisdom, “buy on the pull back” and “keep your powder dry”. It even gets a bit like Warren Buffet. I have built a number of automated trading systems based on simple indicators, but the ones based on price using “pull backs” usually outperform. In a way you are buying at fire sale prices, buying low to sell high later. This really should not be a surprise that it works.

But as for stops, they are needed not because they make sense, but because they let humans trade with comfort. If you can’t relax you cannot day trade, but you will pay a fee to the market for that comfort. The pro traders tell me it is worth the cost.

Ok.. It's not clear to me what your position is... Also I don't know if you are referencing stocks or futures..

IMHO, not using stops is an excuse for not having a viable trading plan... If you don't get stopped out you can't lose - eventually you will be right if you can only wait it out... - Really?

A viable trading plan is all about risk management, stops, etc.. If you do not know how/where to place a stop you will be stopped out.. If you bunch your stop with everyone else you will be stopped out... if you don't use a stop you will be financially carried out...

Stops are just overhead, cost of production. If you run any business you need to know what your yield should be - factoring volatility - drawdown, etc..

I don't want to sound annoyed here but not thinking a hard stop should not be used is nuts.

I use disaster stops and they hardly ever get hit..I typically know when I'm wrong..the idea is if you have a viable set up and process the market will tell you when you are wrong..then you exit...FOr me the stop is there just for the things you can't anticipate... Like suppose you have a heart attack or a power outage either at your end or the server at the exchange gets does and has happened..then where are you...

As far as the flash crash...that's part of the game... nasty but stops guarantee nothing... at least in the electronic market you have a better shot...

By all means if you can't employ a viable risk management plan you are better off going to the Casino - at least you'll get to see a good show... while yu lose your $.





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Last edited by roztom; February 24th, 2012 at 06:43 PM.
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  #112 (permalink)
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Admittedly, I have not read this full thread but I found this spreadsheet interesting:

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cpi65 View Post

entries are important, sure... but the trade that makes your PnL is the exit!! One isn't more important than the other dude!


Tis true. On thing I've noticed about my own trading and the reason some of my wider stops get hit is that I'm not setting up for the right targets. That is, I'm letting the trade run much longer than it should for the time frame I'm in. If you're trading 10 minute chart you can't let the trade run all day because the price also moves according to the longer timeframes. Therefore, one can't set your targets based on a sixty minute chart if your trading a 2 minute. The targets are too wide and therefore unreasonable in the context of the 2 minute chart. I used to do this all the time. I'd set a tight stop on the 5 minute chart and expect price to go immediately to some target on the hourly chart. Of course price gyrates around on its way to that target and then I get stopped out. So you're right CPI, exit is critical.

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  #114 (permalink)
Chicago, IL. USA
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Many of us stops obviously as a risk management tool but as you suggest getting "out of dodge" with your $ is where the financial rubber meets the road..

IS there a thread here on Exit/Profit Management?




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