Stop loss or % of capital?

[jimmy1jag]

I recommend you read through my thread "Journey from the Basement".

I've read it all and worked on some of the nuggets contained in there!! I have to say that that thread has sent me down several very interesting and rewarding paths. Thank you.

I do need to go through it again sometime fairly soon though.

 

[SOCRATES]

I've read it all and worked on some of the nuggets contained in there!! I have to say that that thread has sent me down several very interesting and rewarding paths. Thank you.

I do need to go through it again sometime fairly soon though.

Good ! Excellent ! I am pleased ...

 

[Splitlink]

If you are interested in my view of risk taking, look at post number 145 on page 4, US Day Traders Thread..

A very interesting thread, Socrates, I enjoyed it very much.

I'm having trouble finding the above post. What platform is it on, please?

Split

 

[fxmarkets]

here split, page 15 it was.

http://www.trade2win.com/boards/showthread.php?t=14526&page=15&pp=10

 

[fxmarkets]

with stops and when people are venturing off into it all, it doesn't help them that you frequently come across advice along the lines of, need to give it room, perhaps encouraging an image that pro's are , happy for negatives against their position for a period of time because it or they are seen to be cool and not shaken by this move against entry. In short, theres so much out there and people can guess that this is what goes on so i'll hold in, like a pro...


but you do come across successful traders who take this stance and come out overtime profitable, is it fair to say that they have half an idea on entry, average and , solid discipline, to hold when its against ? But even they would increase profit to risk if they sorted the entry out. Grind an edge to it all.

 

[barjon]

I suppose it's a question of timing - if your sense of direction is good AND your timing is good then tight stops follow. However, if your timing is iffy then.....................

From general discussions with traders, I would say that excellent traders have excellent timing and - with only one or two exceptions I can think of - the excellent tend to tight stops. Be interesting to know if that's the impression others get.

good trading

jon

 

[SOCRATES]

with stops and when people are venturing off into it all, it doesn't help them that you frequently come across advice along the lines of, need to give it room, perhaps encouraging an image that pro's are , happy for negatives against their position for a period of time because it or they are seen to be cool and not shaken by this move against entry. In short, theres so much out there and people can guess that this is what goes on so i'll hold in, like a pro...


but you do come across successful traders who take this stance and come out overtime profitable, is it fair to say that they have half an idea on entry, average and , solid discipline, to hold when its against ? But even they would increase profit to risk if they sorted the entry out. Grind an edge to it all.

There are many kinds of edges. There are edges on Technology, Technical Analysis, Timing,
to name just three, of a whole family of edges that a top trader must be master of in order to be consistently successful. The ability to cut losses short and quickly is a prerequisite to the edge on the management of capital.

There is an opportunity cost inherent to tight stops. This is because if capital is allowed to become eroded by dereliction of a tight stop loss policy (otherwise rigidly enforced) , then later the amount of work required to get the balances back can be out of proportion to the benefits.

For this reason the professional stance must be to enforce a tight stop loss policy at all times. There is no point in having opinions as to whether the price may come back or not.
There is no point either in playing the hero and holding on to bad positions. Losses must be cut immediately. This is because later on an opportunity WILL arrive.

You must be in a condition to give the opportunity that arrives rapid fire with both barrels if you want to, instead of having to limit exposure as a consequence of accumulated deficits, which are unnecessary.

The matter of remaining cool is a different topic altogether. The ability to remain cool is part of the Method Armoury and the Mindstate Armoury and the Mindset Armoury, because these are some of the WEAPONS, whereas the correct use of stops is part of the AMMUNITION.


Kind Regards.

 

[SOCRATES]

I suppose it's a question of timing - if your sense of direction is good AND your timing is good then tight stops follow. However, if your timing is iffy then.....................

From general discussions with traders, I would say that excellent traders have excellent timing and - with only one or two exceptions I can think of - the excellent tend to tight stops. Be interesting to know if that's the impression others get.

good trading

jon

Hello Barjon, it is absolutely a matter of timing, razor sharp timing, to the nanosecond, as part of reflex in response to instantaneous judgement, particularly in challenging situations in very fast and very liquid markets, where there are some super whipsaws and sudden plummets and other marvels.

But you are not likely to get top traders to explain all the mechanics, you are likely to get views from observers at best, and then, very frequently, these observations are based on the observer's frame of reference as to why, how and when, which is not necessarily the same frame of reference of the individual being observed, who may then go on, by neccessity, to explain ........but only in a way that the observer can grasp at his level of proficiency, of development. And that can prove to be a problem if and when it is passed on.

Very Kind Regards.

 

[frugi]

I agree with Barjon and Socrates. Also good to see you posting again Socrates.

A loose stop is a tacit admission that one's entry may be poor.
Tight stops encourage one patiently to seek optimal entries and are cheaper than loose ones during the learning process, when finding them can prove elusive.
A tight stop allows the trader to be wrong several times yet when the expected big move is finally nailed these losses prove small in comparison.
I don't understand the concept of "breathing room". If the entry is good then breathing room is not required; if it isn't then get out and wait for another.
Tight stops demand more work and screen time from the trader, but the reward is commensurately greater, as it should be. They also take one out of the market quickly and cleanly, thus allowing for more objective judgement and seeking of fresh opportunity than may be available to someone stuck in a loose stop losing trade.
Tight stops allow the trading of greater size for the same risk as a smaller pozzie with a looser stop. This helps P/L enormously when entries become sharper.

Of course loose and tight are subjective definitions and a scalper doing 4000 turns a day is likely to use a tighter stop than, say, someone investing in the dogs of the Dow once a year, but imho learning traders of all timeframes are apt to seek false comfort in a looser stop than is prudent or logical. This observer certainly did.

 

[TheBramble]

Within the context of the thread initiator's first post, the majority of subsequent posts which have in any way attempted to address his question at all, have been largely correct in terms of discussing a protective stop.

What Kunal was also asking was about use of a trailing stop - i.e. when to lock in your gains. In this respect, 'breathing room' is a perfectly appropriate concept to consider. Basing your exit on a target is all well and good - if it's hit. But even then, on many occasions, you'll be doing yourself out of further action in your favour. Rigidly sticking to your target in the face of unfolding market time (however slow or fast that may be running) and action is simply illogical.

Using the dynamic volatility of the instrument in which you have an open position as a basis for establishing how much leeway you plan on giving it provides an edge over those who are target-bound (and who potentially fall back to BE or worse).

While some will tighten their trailing stops in times of high volatility, there is also an argument for backing off and using that very same volatility to inform you of the envelope which the price is likely to describe. The former could be viewed as a response to fear (of potential loss - even when in profit - potential loss of current level of gains). The latter could be viewed an emotionless estimation of probability. Neither of these views is correct in itself. Each situation and approach to leeway in trailing stops needs to be evaluated as part of your method and a willingness to adopt whichever meets current circumstances and highest probability should be implemented.

 

[sandpiper]

I agree with Barjon and Socrates. Also good to see you posting again Socrates.

A loose stop is a tacit admission that one's entry may be poor.
Tight stops encourage one patiently to seek optimal entries and are cheaper than loose ones during the learning process, when finding them can prove elusive.
A tight stop allows the trader to be wrong several times yet when the expected big move is finally nailed these losses prove small in comparison.
I don't understand the concept of "breathing room". If the entry is good then breathing room is not required; if it isn't then get out and wait for another.
Tight stops demand more work and screen time from the trader, but the reward is commensurately greater, as it should be. They also take one out of the market quickly and cleanly, thus allowing for more objective judgement than may be available to someone stuck in a loose stop losing trade.
Tight stops allow the trading of greater size for the same risk as a smaller pozzie with a looser stop. This helps P/L enormously when entries become sharper.

Of course loose and tight are subjective definitions and a scalper doing 4000 turns a day is likely to use a tighter stop than, say, someone investing in the dogs of the Dow once a year, but imho learning traders of all timeframes are apt to seek false comfort in a looser stop than is prudent or logical. This observer certainly did.

Frugi,

ditto

The following extract sums it up for me and supplements what is being said by Socrates, John and Frugi suitably. I have always found the source extremely helpful and it's been a while since anybody has mentioned POP.

"It is important to understand that we are saying the one criteria for removing a position is because it has not been proven correct. We at no time use as criteria for removing a position the fact that the market proved the position incorrect.

There is a big difference here as to how we treat all positions from what most traders use. If the market does not prove the position correct, it is still possible the market has not proven the position wrong. If you wait until the market proves the position wrong, you are wasting time, money and effort in continuing to hope it is correct when it isn't.

How many traders ever hoped it wouldn't be proved wrong instead of hoping it was correct? If you are hoping it is correct, it obviously wasn't ever proven to be correct. Remove the position early if it doesn't prove correct. By waiting until a position is proved wrong, you are asking for more slippage as you will be in the same situation as everyone else getting the same message.

What makes this strategy more comfortable is that you must take action without exception if the market does not prove the position correct. Most traders do it the opposite by doing nothing unless they get stopped out, and then it isn't their decision to get out at all -- it is the market's decision to get you out.

Your thinking should be: When your position is right, you have to do nothing instead of doing nothing when you are wrong!

I don't mean to repeat and repeat but, in this case, you will better understand the rule the more you read it. It is very critical to your success in trading. Over time it has proven to be the rule which keeps the losses small and keeps a trader swift and fast to take that loss.

A person's thinking when the market proves a trade to be bad is counter to what is productive. By using the rule properly, you are productive and don't have to face the demoralising effect of the market when you have a proven wrong position. This enables you to continue to trade with the proper frame of mind. You are more objective in your trading this way than letting a negative reinforce your thinking. This way you only let good trading reinforce your thinking and actions".

Taken from:

Phantom of the Pits - The Gift.

 

[fxmarkets]

Within the context of the thread initiator's first post, the majority of subsequent posts which have in any way attempted to address his question at all, have been largely correct in terms of discussing a protective stop.

Thats what kunal needs as i read it, not trailing, at this stage i read it to to be and when he responded to a post, implies he is taking too many hits from entry, he wasnt or didnt seem to be talking about extracting optimum profit from majority of trades , or luxury of thinking the problem of how much shall i take on this one. which you have with great entries.

his confidence is low in pulling the trigger as a confirmation of entry edge is coin flip at best this stage.

A trailing stop to me also suggests the exit is being left to random chance.

shouldn't we demand and expect of ourselves great entries and great exits. but i'd say you need the former to stand any chance of grasping the latter before your monies gone.

 

[TheBramble]

Thats what kunal needs as i read it, not trailing, at this stage i read it to to be and when he responded to a post, implies he is taking too many hits from entry, he wasnt or didnt seem to be talking about extracting optimum profit from majority of trades ,

Using a stop loss of 5%, I find that very often my stop is triggered after which the stock moves up again. Also, after the trade is in profit, by using a trailing stop I'm limiting the amount of profit that can be taken.

He was asking about both.

 

[fxmarkets]

Yes agree, but triage in flow here, 75% of trades being stopped out, he's increasing stops off entry to adjust that ratio, when he can flip it to 75% + move swiftly into profit off entry, then the luxury of how much shall i take here should be addressed maybe.

 

[TheBramble]

I take your point. But it would be awful for good old Kunal to have taken on board all the good stuff he's been offered here and tomorrow, hit 10/10 good trades, and still be sitting on them at market close for lack of any exit strategy.

Just seems to me to make more sense to hit the problem head-on, all in one go.

 

[fxmarkets]

yeah agree there to a point ,thats back to my golf ball theory from another thread, great entry cant close out, stand across the other side of the room and chuck a golf ball on the liquidate button. still do better than a coin flip, wide stop merchant. maybe

maybe kunal will come back in a few months and let us know how s/he is progressing..

 

[fxmarkets]

And funny thing, using the golf ball exit method will likely (because of relaxed fun focus mindset easing with price flow, and missing the button with golf ball) lead the trader to drop the ball run over and close out the trade at very favourable price. realising its easier to close it out than hit the button with the golf ball. and how silly it all was.

non the less, on his or her desk sits a golf ball as a fond reminder of that stage.

 

[SOCRATES]

I agree with Barjon and Socrates. Also good to see you posting again Socrates.

A loose stop is a tacit admission that one's entry may be poor.
Tight stops encourage one patiently to seek optimal entries and are cheaper than loose ones during the learning process, when finding them can prove elusive.
A tight stop allows the trader to be wrong several times yet when the expected big move is finally nailed these losses prove small in comparison.
I don't understand the concept of "breathing room". If the entry is good then breathing room is not required; if it isn't then get out and wait for another.
Tight stops demand more work and screen time from the trader, but the reward is commensurately greater, as it should be. They also take one out of the market quickly and cleanly, thus allowing for more objective judgement and seeking of fresh opportunity than may be available to someone stuck in a loose stop losing trade.
Tight stops allow the trading of greater size for the same risk as a smaller pozzie with a looser stop. This helps P/L enormously when entries become sharper.

Of course loose and tight are subjective definitions and a scalper doing 4000 turns a day is likely to use a tighter stop than, say, someone investing in the dogs of the Dow once a year, but imho learning traders of all timeframes are apt to seek false comfort in a looser stop than is prudent or logical. This observer certainly did.

Hello frugi, thank you for your good wishes. I am veribizzi but try here and there to put a word in if and when I have some spare time available.

The concept of "breathing room" is a blanket excuse used by inefficient traders to justify their uncertainty or to assuage their insecurity, or often both. Curiously there are some market personalities ( I will not mention names so as not to inflame, but those of you up to date with events will clock this) who advocate the use of stops in this way. One particular such person insists that a stop should always be placed below the last low when going long and above the last high when going short.

This point of view only encourages ineficcient traders to be more inefficient than they would otherwise be, because it leaves an opportunity available for a large bite to be taken out of the value of the position if an unexpectedly severe countermove develops suddenly.

This would not occur if the stop in the first place was really tight. This idea of "breathing room" is fiercely defended by entities who argue it is valid because it protects the position against a temporary reversal, or against sudden volatility, or against during the progression of the move a retracement to a level along a supply demand line, or a support or resistance level, or a Bolly or any other mechanical marker.

The argument is that this practice is not professional at all, and in consequence is not proficient either, or even advisable, but there you are.

It is not professional because it is amateurish, simply put. A professional posture is to commit with flawless timing at the right price. Then the stop however tight does not get hit.
This is because the expected progression is manifest immediately in line with the expectation, which is different to hope. This applies to absolutely every timeframe, so there are no excuses.

This further reinforces the reason why really expert traders always use tight stops, whether logged or held in the head, as I have said before, the information shock delivered when a position turns out to be wrong, for whatever reason, meaning, for example that the posture taken at the time was indeed correct, but suddenly an unexpected development arises making the original posture taken totally incorrect, then the tight stop is there to cut the loss quickly.

As far as trailing stops are concerned, again, they are valid, but only for beginners. This is because a highly developed ability to read the market is faster in terms of sheer practicality than paying attention to trailing stops, and managing them, as frequently a move develops very quickly and then the exit point chosen as a target in advance of the event is a matter of experience, understanding, and familiarity with the instrument being traded etc.,

Of course we all have to start somewhere. No one is born knowing.

We all have to learn, but more important still is we all have to teach ourselves to learn.

I expect what I explain above clarifies the matter to your satisfaction.

Very Kind Regards.

 

[fxmarkets]

Theres a gauntlet of very high standards to be achieved, being thrown to the ground in this thread, I guess its up to each individual if they have unshakeable belief in themselves , that over time, that they will continually extend grasp beyond their current reach ,leading to their time when they can simply reach and pick it up because thats what they expect of themselves.

well at least fondle the bugger.

Cheers Soc, thanks for your time.


Fx.

 

[SOCRATES]

Theres a gauntlet of very high standards to be achieved, being thrown to the ground in this thread, I guess its up to each individual if they have unshakeable belief in themselves , that over time, that they will continually extend grasp beyond their current reach ,leading to their time when they can simply reach and pick it up because thats what they expect of themselves.

well at least fondle the bugger.

Cheers Soc, thanks for your time.


Fx.

My Pleasure Sir.