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Zero-risk trading strategy?


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Zero-risk trading strategy?

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  #1 (permalink)
Toronto , Ontario, Canada
 
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Hey guys,

I am quite fairly new to the forum and the stock market (from an analytical perspective and with the intent to learn trading), I had a question and I know it's pretty stupid strategy but I wanted to know why this wouldn't work.


So everyone suggest you need stops to mitigate your risks right, but what if you have your stop loss at a value that the market would not hit in a day (even with news like brexit), like lets say i keep my target at 2 or 3 points, but my stop loss at like 700 points+. I know for sure that the market will bounce back if it goes down 10-20 points in an hour lets say.

Like if I wanted to buy a future (ES, just for example purposes), its at $2000 lets say. I have my target at 2002 or 2003 which it will hit throughout the day for sure, but keep my stop loss at like something ridiculously so high that it would not touch it even with like breaking news (i.e., brexit).

Having a stop loss of like 6-8 ticks will surely make you get stopped out in the span of a day and like if you enter the trade and lets say it goes the other way, given your stop loss won't stop you out, it will eventually come back to the price point at which you went long and it will go up 2 points eventually in a typical trading business day.

Now I see the point of, if the market crashes, it won't come back up to your entry points for months and months if not a year and holding trades overnight or stuff can be costly and stuff, but assuming a normal trading day with no advance news around the corner like brexit.


Would love to hear some thoughts on this thought.

Thanks,

John

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  #3 (permalink)
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Okay i think i may have the answer, is it because like brokers would liquidate you out if you even attempt to put a stop loss that low, and create a potential HUUUUGE loss?

if that's the case then yeah i can see why that strategy would not work, since a beginner would be on some margin ratio

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  #4 (permalink)
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noobforlyfe View Post
Okay i think i may have the answer, is it because like brokers would liquidate you out if you even attempt to put a stop loss that low, and create a potential HUUUUGE loss?

if that's the case then yeah i can see why that strategy would not work, since a beginner would be on some margin ratio

You've answered it yourself. Buying the ES at 2000 with a stop loss at 1300 would mean that, in theory, you would need 35k in your account.

I say in theory because as you pointed out it is unlikely the ES would lose that much in a short period of time. Still, basically however much you're prepared for the market to go against you you need to have the money in the account for it.

The above does not even account for the psychological pressure you would feel in such a situation. Bobwest pointed out in another thread that trading with your own money adds a completely different spin to the whole thing - "now it's for real"-kind of feeling.

---------------------------------------------------------------------------

Having said all of the above, a well-respected trader called Linda Rashcke suggests that you can actually work out a stop which is outside of the daily fluctuations (she calls it noise), via an indicator named ATR. See video



Bear in mind again the bottom line: whatever amount you may be prepared to accept in terms of market going against you, you need to have it in your account.

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  #5 (permalink)
Legendary Market Wizard
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Hi John

Game theory says that this is a very bad game:
Looking at the win/loss ratio!

If so - why not forget the stop?

But in reality your broker will need more margin speaking of your 700 points plan.*
In fact if the prize is not going back to your entry point the same day then you
need to hold over night or weekend. This means today that you need double the
daily margin.
Check your broker's margin page and you will see what is meant.

Good trades
GFIs1

*How many trading days do you need - assuming a 5 points up every day when you
had a unique 700 points loss? Check on calculator

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  #6 (permalink)
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xplorer View Post
You've answered it yourself. Buying the ES at 2000 with a stop loss at 1300 would mean that, in theory, you would need 35k in your account.

I say in theory because as you pointed out it is unlikely the ES would lose that much in a short period of time. Still, basically however much you're prepared for the market to go against you you need to have the money in the account for it.

The above does not even account for the psychological pressure you would feel in such a situation. Bobwest pointed out in another thread that trading with your own money adds a completely different spin to the whole thing - "now it's for real"-kind of feeling.

---------------------------------------------------------------------------

Having said all of the above, a well-respected trader called Linda Rashcke suggests that you can actually work out a stop which is outside of the daily fluctuations (she calls it noise), via an indicator named ATR. See video



Bear in mind again the bottom line: whatever amount you may be prepared to accept in terms of market going against you, you need to have it in your account.

Hello xplorer, who is this person she is saying almost exactly the same thing than me about the stop with almost the same numerical values did she copy my post on fio lol ?
Edit i just see the name sorry .

Ok I google the name, she is famous....lol but I came on my side with the exact same value (never heard of her previously)

3 time the Average range of the bar you trade
time stop
tighten the stop once the trade work

I can't say more I had the felling of hearing myself. It is a good feeling when you heard that from someone with a strong background like her.

R.I.P. Olivier Terrier (aka "Okina"), 1969-2016.
Please visit this thread for more information.
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  #7 (permalink)
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noobforlyfe View Post
like lets say i keep my target at 2 or 3 points, but my stop loss at like 700 points+. I know for sure that the market will bounce back if it goes down 10-20 points in an hour lets say.

Like if I wanted to buy a future (ES, just for example purposes), its at $2000 lets say. I have my target at 2002 or 2003 which it will hit throughout the day for sure, but keep my stop loss at like something ridiculously so high that it would not touch it even with like breaking news (i.e., brexit).
...
Would love to hear some thoughts on this thought.


noobforlyfe View Post
Okay i think i may have the answer, is it because like brokers would liquidate you out if you even attempt to put a stop loss that low, and create a potential HUUUUGE loss?

if that's the case then yeah i can see why that strategy would not work, since a beginner would be on some margin ratio

Sure, you could do this. You just have to have the margin for it, since the loss, if it comes, will be yours.

To explain: Say you wanted a 700 point stop. OK, you would need how much margin? Well, 700 points times $50/point = $35,000. You are going to need that much margin, cash money in your account, in order to ride out a loss that size. That's for a 1-contract trade. Multiply that amount by the number of contracts for your required margin. (You would actually need more, because the broker would close you out as your account approached zero.)

And no, the broker is not going to let you ride out this size loss without you having put up the money to cover it. Otherwise, the broker has to eat it, which they are not going to do.

So, if you don't have the margin, when your account margin gets close to being eaten up during the day, the broker will close you out.

There is no risk-free strategy. Sorry.

Bob.

Edit: Oops, just saw the @xplorer beat me to it, and did a better job, too.

I liked the Linda R. video. She's always worth listening to.

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bobwest View Post
Sure, you could do this. You just have to have the margin for it, since the loss, if it comes, will be yours.

To explain: Say you wanted a 700 point stop. OK, you would need how much margin? Well, 700 points times $50/point = $35,000. You are going to need that much margin, cash money in your account, in order to ride out a loss that size. That's for a 1-contract trade. Multiply that amount by the number of contracts for your required margin. (You would actually need more, because the broker would close you out as your account approached zero.)

And no, the broker is not going to let you ride out this size loss without you having put up the money to cover it. Otherwise, the broker has to eat it, which they are not going to do.

So, if you don't have the margin, when your account margin gets close to being eaten up during the day, the broker will close you out.

There is no risk-free strategy. Sorry.

Bob.

Edit: Oops, just saw the @xplorer beat me to it, and did a better job, too.

I liked the Linda R. video. She's always worth listening to.

Haha I was about to reply saying "kinda stealing my thunder there bob"

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  #9 (permalink)
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xplorer View Post
Haha I was about to reply saying "kinda stealing my thunder there bob"

Yeah, like I said, "Oops."

Bob.

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  #10 (permalink)
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Yeah i figured, but thanks for the confirmation and other tips everyone! I appreciate it, as I am still extremely new hence the stupid questions :$.

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