stop loss. why????

[Shakone]

jeffre, you started a thread about why people use stop loss. You received some answers. Don't see a problem really. You don't agree which is fine, trade how you like. But no point starting this thread unless you wanted other opinions.

Ok, so to the maths of your trade. You entered at 5350. You then entered another 4 positions up to 5800 or so, and this represents a loss of 8%. Just for example, lets say you have an average price of 5600, an account of 10,000. You then have a £4 per point bet short on the FTSE average price 5600, that's 8% down or so. That means initially you were aiming with a £1 per point bet, for 90 points or 0.9%. You've waited for over 4 months, and are at -8%.

Now, does it seem likely to you, that someone who is willing to wait 4 months to make 0.9% on the first trade, and is 8% down for that 4 months, is likely to make 100% in the year? Maybe you will, maybe you have, but on the info you've given, it doesn't look likely. I understand that you might not take 0.9% on every trade, but you did mention you would reduce your position from 4 to 4 a lot earlier than 5260.

You keep saying you believe it is a valid target. Well so what? Didn't you believe that when you entered at 5350, it would go down? And weren't you wrong about that?

So you've received plenty of responses about why you should use stop losses. Please give some good reasons why you shouldn't.

 

[jeffre4]

i'm exhausted with it now. will sit on the sidelines and we can watch what unfolds.I will be back on this thread. i am trying to think of another thread to cause debate i will soon be a leg - end member i mean legendary member

 

[Shakone]

This thread has some good posts on the topic

http://www.trade2win.com/boards/trading-psychology/15642-stoploss-theory-failure.html

 

[new_trader]

Hi jeffre4,
My job - or part of it at least - is to encourage and facilitate constructive debate - not to stifle it! So, I applaud your thread and am slightly surprised there aren't more members putting forward an argument against the use of stop losses. That said, I think the comments from your critics that appear harsh are - often as not - well meaning.

In its 10 year history, the boards of T2W are littered with former members who thought they could judge market sentiment and, instead of using a stop loss, would average down - convinced that the market would bounce back in their favour. I'm not saying that this can't be done - or should never be done - but those who utilise this approach successfully need some sort of fail safe mechanism in place for the one time when the market doesn't bounce back. And that time will surely come - as I know to my own cost. Many years ago, I grew my account by 26% in under 3 months and then blew up, losing 70% of it on one trade that went disastrously wrong. Whilst this may not be a fair characterization of your trading style, hopefully, you'll understand why members might conclude from your posts that this is what you're doing and why they then make the comments that they do.
Tim.

The Premise was: People use stops because they are not confident with the position they opened in the first place.

I’m not sure how anyone can think that hedging a position means you are more confident than someone using a stop loss.

Either you’re confident of your position or you’re not. How he manages risk is beside the point.

 

[rawrschach]

Just cuz youre 'confident' in your position doesn't mean there shouldn't be a contingency in case you're wrong.

 

[Hoggums]

People use stops because they are not confident with the position they opened in the first place.

Unfortunately confidence has nothing to do with the markets.

The only really confident traders are the ones with stops in place. They know they are very unlikely to go bust on their latest trade. Everyone else is delusional.

 

[Lickyluciano]

Jeff; over 95% of traders eventually end up losers. At some point they they thought they were winners just like you. Yes, they were just lucky. This beginners luck has been written about and warned about many times, you just have to seek it out. The greatest traders (meaning returns and LONGEVITY) tell us NEVER add to a losing trade. None of them ( that I am aware of) have ever said, just average down until you are proven right.
I choose to listen to the winners, the 5% ers rather than the 95%ers who lose. You'd be wise to do the same. This is the best common sense warning anyone can possibly give you. This should've good enough.

 

[new_trader]

Unfortunately confidence has nothing to do with the markets.

The only really confident traders are the ones with stops in place. They know they are very unlikely to go bust on their latest trade. Everyone else is delusional.

I was merely restating the OP’s original premise. I strongly encourage the use of stops because when you know what you are doing they rarely get hit. However, I think the idea that only traders who lack confidence use stops is flawed.

Traders who lack confidence are less likely to use a stop (or they trade with a very wide stop to give the market room to ‘breathe’) because they are afraid the market will retrace just enough to hit their stop and reverse. A proficient trader is often confident they have entered at the right time but will use a stop because it is a crucial safeguard against misjudgement or the unknowable.

If you are a proficient trader there is no reason why you wouldn’t use a stop, ironically, if you don't use a stop, you will never last long enough to become proficient.

 

[timsk]

Hi N_T,

The Premise was: People use stops because they are not confident with the position they opened in the first place.

I agree that's one aspect of the use of stop losses that's under discussion - but it's not the only one.

I’m not sure how anyone can think that hedging a position means you are more confident than someone using a stop loss.

If that's what works for you - great. Others might say they're not sure how anyone can think that using a stop loss means you are more confident than someone who hedges their position.

Either you’re confident of your position or you’re not.

Confidence tends to be a movable feast for most traders and is often correlated to their P&L. During periods of drawdown, confidence levels drop; when everything is going tickety boo, confidence levels rise.

How he manages risk is beside the point.

In my humble opinion, managing risk is very much the point, most especially for someone who advocates against the use of stop losses.
Tim.

 

[new_trader]

Tim,

My question is: How is a hedge considered different to a stop loss if both can be used to mitigate losses on a trade? The OP asserted that a stop is used by traders who aren’t confident with a position they have opened, but further into the thread stated that he hedges his trades. Do you see my point?
This thread was never about stops Vs hedging, if it was, it was never made clear from the start.

 

[timsk]

Tim,

My question is: How is a hedge considered different to a stop loss if both can be used to mitigate losses on a trade? The OP asserted that a stop is used by traders who aren’t confident with a position they have opened, but further into the thread stated that he hedges his trades. Do you see my point?
This thread was never about stops Vs hedging, if it was, it was never made clear from the start.

Hi N_T,
I agree that the thread is not about stops Vs hedging. The one and only point I've been trying to make since joining the discussion is that if the OP has hedged his FTSE short then, potentially, he has offset his risk to some extent and the criticism that he has an open and unprotected position isn't accurate. But yes, I take your point about being confident - or not - about the trade.

With regard to your question about the difference between stops and hedges, I'm not really qualified to answer. That best comes from someone who has extensive experience of the latter - which I don't have. However, the nature of a hedged position is that it's dynamic which gives the trader options that aren't available to the trader who only utilises fixed stops.
Tim.

 

[Hoggums]

But if you are effectively zero-ing out your position with a hedge - that's the same as closing it - except you've still got a ton of margin used up in your account.

There are some effective hedging, e.g. using options - OTM vanillas, barriers etc or possibly spread trading, but as with any hedge - you have to question whether the cost of the hedge is worth it compared to just getting out of the position early.

I understand peoples reluctance to take a loss - I suffered from that for years. But, as I've learned, this mainly stems from the fact that you have no confidence in your strategy. Your strategy is untested and you've failed to analyse what the worst scenarios could be. Once you know these facts and figures, a simple loss is no bother. My most successful strategy makes very little money for much of the time, with the account balance meandering up and down, but every now and then it gives a super profit before settling down to drift up or down slowly again. Unless you’ve tested your strategy and know this is what happens, how can you have confidence in it? If you start and for the first 4 weeks you make no money from it - most people would give up.

 

[the hare]

My most successful strategy makes very little money for much of the time, with the account balance meandering up and down, but every now and then it gives a super profit before settling down to drift up or down slowly again. Unless you’ve tested your strategy and know this is what happens, how can you have confidence in it? If you start and for the first 4 weeks you make no money from it - most people would give up.

Words of wisdom.

 

[neil]

before all the sceptics just over my last comment again 100% profitable trades was incorrect i do close trades off if it appears that a fresher target appears which may mean closing one trade at a small loss to receice a larger gainb that is not the same as stop loss but a calculated close. re the maths are round if i am stil making around 2-3 trades a day profitable why can i not still be on track

The Black Swan will get you

 

[Splitlink]

I have been a reasonably successful trader over the years, economically. Keeping ahead of the game by waging a kind of guerrilla war.

That does not satisfy me, however. I would like to really make a packet and continue to do so. Wouldn't we all!

Having a comfortable account just now I have been going back to my ideas of years ago, when I used large stops. By large, I mean 40 points on Footsie.

Yesterday, I went out for most of the morning leaving a buy order on and came back to a 12 point profit. In the afternoon I took a short and made 17 points. Each trade had 40 point stops on. I could have made more in the afternoon but it will take a while to get rid of my urge to get out quick.

I'm going to try my 40 point stop plan, if only that it is more peaceful. It was, yesterday, anyway. Instead of 6 trades, I had 2.

I'll see how it goes and let you know.

 

[timsk]

Yesterday, I went out for most of the morning leaving a buy order on and came back to a 12 point profit. In the afternoon I took a short and made 17 points. Each trade had 40 point stops on.

Hi Split,
I don't want to be a killjoy but, if these first few trades are any sort of indicator of future profits on your winning trades, then you're going to need a success ratio of almost 75% just to break even!
Tim.

 

[Splitlink]

Hi Split,
I don't want to be a killjoy but, if these first few trades are any sort of indicator of future profits on your winning trades, then you're going to need a success ratio of almost 75% just to break even!
Tim.

Well, you are a killjoy!

Hey, Cheer Up! I ain't gone, yet! First two trades were successful, although the R/R rate is not great.

The thing is, Tim, that my objectives are different. I'm 80, I don't need the money and I want to try to get away from the computer as a pastime. Sitting on a park bench on a sunny day, reading a book, has its attractions. You should try it, yourself!

The important thing is to try to find overbought/oversold points. I do not expect the stops to get taken out--and. from exèrience, I know that I am not good at getting 40 point profits, so 1/1 is unlikely. I'll keep you posted and I have no fish to fry. I can afford to be truthful.

 

[timsk]

The thing is, Tim, that my objectives are different. I'm 80, I don't need the money and I want to try to get away from the computer as a pastime. Sitting on a park bench on a sunny day, reading a book, has its attractions. You should try it, yourself!

Hi Split',
Congratulations on being 80 and an active trader as well!


As it happens, our objectives are much the same. Like you, I'm wanting to spend less time in front of the computer and more time outside in the sunshine. To that end, I'm wintering in Andalucia.
Tim.

 

[kalott]

Why does practically everybody put a stop loss on a trade. I believe that it means that you were never confident with the posistion you opened in the first place. If you have done your homework and you believe that whatever you are trading will hit a certain target then you should let run until it does. The companies love stop losses because all you are doing is locking in your losses. How many times do traders say it hit my stop loss then 10mins 1hr 1 day etc it hit my target. Forgive me if this as been discussed before but new to the site.

"How many times do traders say it hit my stop loss then 10mins 1hr 1 day etc it hit my target."

If all sell at a profit, who will pay the profit

Bernanke and Draghi?

 

[Splitlink]

Hi Split',
Congratulations on being 80 and an active trader as well!


As it happens, our objectives are much the same. Like you, I'm wanting to spend less time in front of the computer and more time outside in the sunshine. To that end, I'm wintering in Andalucia.
Tim.

I hope that you did not experience that bad weather 7-10 days ago. Maybe, it was north of where you are, I know that Murcia and Valencia caught some. When it rains here.,.....!