Stop Losses

[dbphoenix]

I totally agree.

That is exactly what my stop loss is there for.

I buy a breakout for the sake of argument.

Before I enter my trade I know where price is going to allow me to exit this trade as a loser, lets say somewhat beyond a previous swing low, or as a function of volatility / ATR, etc.

If I am taken out I am taken out and it's no big deal at all.

But I have been disciplined and taken a loss that is always roughly the same size percentage wise of my account, I always lose say 2% when I lose, whereas when I win on average it's always a multiple of that, because on average my winners are many multiples larger than my losers.

This way I can be "wrong" way beyond 50% of the time, and yet be very net profitable.

I think it is exactly this way of trading that totally discounts emotions, you just do not care about hit rate or the individual trade at all, all you care about is your long term edge and your net profits.

This isn't quite what I was talking about, so I ought to clarify, even though you may be taking a different direction using my comments only as a starting point.

When I say "unemotionally" and "continue to assess trading conditions", I mean, using your example, to take the breakout, then, if it fails, look for an opportunity to fade that breakout or to take a retracement back to the point of the breakout. If a retracement setup presents itself and the trader takes it and that fails as well, he'd then turn to the fading option. If that didn't work either, he'd then evaluate other courses of action.

But being stopped out of the breakout entry would not mean that trading opportunities in toto were "over", even though that particular trade would be, and he would not be justified in leaving the arena to go make a sandwich unless and until he had exhausted all other possibilities. If, for example, he shorts a double top, and the trade "fails", he may find that a triple top is forming just a few minutes later, and that's the one to take. But he probably won't if his panties are all in a twist about having gotten the just-failed trade "wrong".

 

[0007]

But except for the catastrophe stop, used in the event of a power disruption or the loss of the connection to the broker or a sudden, temporarily incapacitating mini-stroke, stops are nothing more than training wheels, used by those who aren't yet confident in what they're doing. These individuals place the trade, set the stop, then sit back hopeful (or fearful, as the case may be) and hand over all responsibility for the trade to the stop. If and when they are stopped out, they state (or wail) that they were "stopped out", as though they themselves had nothing to do with the outcome of events.

Stops are essential to those who are not yet able to trade unemotionally, which, from what I read, is just about everybody. But those who can continue whatever assessment of conditions that they began before placing the trade throughout and after the entry will find little use for stops. If the trade is wrong, for whatever reason, they're out, and they continue their assessment of trading conditions without interruption, looking for the next opportunity.

db - agree your philosophy and yes, get out the moment you know it's wrong. But a sensible stop to my mind is part of money management and my survival. You can still trade unemotionally with stops in place (I find mental ones are good - backed up by an emergency "save your life" one.)

I see it in a similar way to flying a military jet - you have the situation under control and know what you're doing and normally don't need to use your ejector seat. But it's nice to know it's there.

 

[BSD]

Ah, no fundamental disagreements there at all DB.



I totally accept that high speed reaction stuff like that is very feasible if one has a good understanding of price as I know you do.

I guess the difference between you and me is that for me, if you pull up a 1hr GBP/JPY chart - my main executing trading time frame - on say netdania.com, we have been in the latest downtrend on that pair since around January 30th, that I have been hugging all through the wiggles ever since Jan 30th, and am holding still.

During all that time that has been one trade for me, you would have been trading many trend and countertrend wiggles, while I just try and catch the one dominating wiggle direction on my time frame, and then hold on for as long as the ride lasts.

Different horses for different courses.

 

[gamma]

No such luck my friend my ass is on the line like everyone else's

 

[firewalker99]

Stops are essential to those who are not yet able to trade unemotionally, which, from what I read, is just about everybody. But those who can continue whatever assessment of conditions that they began before placing the trade throughout and after the entry will find little use for stops. If the trade is wrong, for whatever reason, they're out, and they continue their assessment of trading conditions without interruption, looking for the next opportunity.

Unless one has the time and willingness to stay focused at the screen all the time whilst one is in a trade, I think he will pretty much appreciate that there exists such a thing as stops. I see it as a perfectly valid way of protecting yourself and I don't understand why a well-placed stop would mean the trader cannot -for example- reverse his position after he's been taken out.

Stops might be "essential" to those who are unable to trade unemotionally, but are they totally redundant for those who can? I should think not... what if something totally unexpected happens that can seriously havoc one's position? Unless you are classifiying this under the "catastropic events"... Suppose M$ made its take-over bid on Yahoo during market hours...

 

[Mathemagician]

Stops are a necessary but dangerous tool to a trader, kind of like a chainsaw to a builder. A chainsaw can be used to help build your house or to rip yourself to shreds. It's up to you to know what you're doing.

jj

 

[bertie123]

Surely you would have to be highly disciplined to execute a mental stop rather than a hard stop? I suspect that many traders would find it hard to execute a mental stop and instead hope that a little more time would see the trade go their way? As a relative newbie I use stops on every trade so I know what my maximum loss is. Trading without stops is for the highly experienced and disciplined trader!

 

[Chorlton]

This is the principle I generally follow with a slight adjustment. I put my stop at a point where it shouldn't go if it's to do what the pattern I saw suggested it would do.

The thing that really trips up a lot of traders is the idea the closer stops mean less risk. That's just not true. The closer you put your stop, the higher the risk of it getting hit and you taking the loss. Put your stop close enough and you pretty much guarantee that you end up losing money on the trade. Markets need room to express normal volatility, but a lot of newbie types get too caught up in the size of the loss they are willing to take and don't consider the odds of taking that loss.

Then too, there are some systems which are actually impaired by the use of stops.

I agree 100%

Where one places a stop loss has nothing to do with RISK Management. You can risk the same amount of money regardless on where the stop is placed.

I would argue that one of the main reasons Newbie's continuously lose is that they do not understand Position Sizing.

 

[Splitlink]

If you enter a trade and it goes against you by 100 pips and comes back and give you 30 pips profits, you are not trading an edge. The reason why you fiddle with the stop is because you don't really know what your edge is on entry.

This is my attitude, too. If the trader is confident of the direction that he thinks the market is going to go, why take a large loss, when a smaller one one will give the opportunity of buying back, lower down, and recouping the loss he made earlier?

Taking large losses removes one of opportunities that the trader has of recouping and taking his general plan into profit or, at worse, breaking even.

However, I will admit to misgivings at times, when I have taken a string of small losses.

Split

 

[gamma]

I agree 100%

Where one places a stop loss has nothing to do with RISK Management. You can risk the same amount of money regardless on where the stop is placed.

I would argue that one of the main reasons Newbie's continuously lose is that they do not understand Position Sizing.

Position Sizing!!
Now this term has come up several times for my benefit and maybe others could someone please expand on this further. I know I will learn something from it.

Thanks

 

[shadowninja]

If I'm to be honest, I am not strong enough to trade without stops.

 

[superfly]

If I'm to be honest, I am not strong enough to trade without stops.

Maybe you could contemplate the following, almost identical, version:

If I'm to be honest, I am experienced enough to trade with hard stops

 

[shadowninja]

hehe in either case, stops are my friends. Well, they're more like my big brother, looking out for me when I make a mistake.

 

[Chorlton]

Position Sizing!!
Now this term has come up several times for my benefit and maybe others could someone please expand on this further. I know I will learn something from it.

Thanks

Gamma,

In laymans terms it refers to how much you are willing to risk. I could give a detailed explanation but to be honest a simply google on Position Sizing will offer many sites offering explanations on this important (and normally overlooked) element of Trading.

Alternatively, I would highly recommend a book by Dr. Van K. Tharp called “Trade Your Way to Financial Freedom”. Reading this book will definately open your eyes to what trading is all about!!!

Most newbies new to trading normally concentrate solely on finding the perfect "Entry". Fewer Newbies go one step further and also look at the "Exit". Very few however, spend the time to focus on what is really important and that is Risk Management, which encompasses Position Sizing.

If I had read this book when I first started taking an interest in the Stock Market & Trading, I could have saved myself a couple of years!!!!

 

[0007]

If I had read this book when I first started taking an interest in the Stock Market & Trading, I could have saved myself a couple of years!!!!

I'll second that. (disdained by some but it got quite a few things straight in my mind)

 

[BSD]

If I'm to be honest, I am not strong enough to trade without stops.

I think it is exactly the opposite: trading without stops means you are weak because you want to be right, and cannot accept that losing is nothing more than a cost of doing business as a trader.

You're a Pro because stops are just the essential instrument for you that they are.

Many of the following guys are Billionaires today like Bruce Kovner, Paul Tudor Jones, George Soros etc:

"Market Wizards and New Market Wizards

- Michael Marcus

Taking advantage of potential major winning trades is not only important to the mental health of the trader but is also critical to winning. Letting winners ride is every bit as important as cutting losses short. If you don't stay with your winners, you are not going to be able to pay for the losers.

In addition to not overtrading, it is important to commit to an exit point on every trade. Protective stops are very important because they force this commitment on the trader.

- Bruce Kovner

Michael Marcus taught me one other thing that is absolutely critical: You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.

Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I'm getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis. I never think about other people who may be using the same stop, because the market shouldn't go there if I am right.

Place your stops at a point that, if reached, will reasonably indicate that the trade is wrong, not at a point determined primarily by the maximum dollar amount you are willing to lose.

If you personalize losses, you can't trade.

- Richard Dennis

When things go bad, traders shouldn't stick their head in the sand and just hope it gets better.

You should always have a worst-case point. The only choice should be to get out quicker.

The worst mistake a trader can make is to miss a major profit opportunity. 95 percent of profits come from only 5 percent of the trades.

- Paul Tudor Jones

I spend my day trying to make myself as happy and relaxed as I can be. If I have positions going against me, I get right out; if they are going for me, I keep them.

I am always thinking about losing money as opposed to making money.

If I have positions going against me, I get right out; if they are going for me, I keep them. Risk control is the most important thing in trading.

The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible draw down.

Risk control is the most important thing in trading.

Ed Seykota

If you can't take a small loss, sooner or later you will take the mother of all losses.

I prefer not to dwell on past situations. I tend to cut bad trades as soon as possible, forget them, and then move on to new opportunities.

The elements of good trading are: 1. Cutting losses, 2. Cutting losses, and 3. Cutting losses. If you can follow these three rules, you may have a chance.

I set protective stops at the same time I enter a trade. I normally move these stops in to lock in a profit as the trend continues.

- Marty Schwartz

I turned from a loser to a winner when I was able to separate my ego needs from making money. When I was able to accept being wrong. Before that, admitting I was wrong was more upsetting than losing the money.

When I became a winner I went from 'I figured it out, therefore it can't be wrong' to 'I figured it out, but if I'm wrong, I'm getting the hell out, because I want to save my money and go on to the next trade.'

Before taking a position always know the amount you are willing to lose.

The most important thing is money management, money management, money management. Anybody who is successful will tell you the same thing.

I always take my losses quickly. That is probably the key to my success.

The best advice I can give to the ordinary guy trying to become a better trader is Learn to take losses. The most important thing in making money is not letting your losses get out of hand.

- James B Rogers, Jr.

The first loss is the best loss.

- Mark Weinstein

You have to learn how to lose; it is more important than learning how to win.

Limit losses quickly. Most traders hold on to their losses too long because they hope the loss will not get larger. They take profits too soon, because they fear the profit will diminish. Instead, traders should fear a larger loss and hope for a larger profit.

- Tony Saliba

I always define my risk, and I don't have to worry about it.

No matter what happens, I know my worst case. My loss is always limited.

- Edwin Lefevre (Aka Jesse Livermore)

It was the same with all. They would not take a small loss at first but had held on, in the hope of a recovery that would "let them out even." And prices had sunk and sunk until the loss was so great that it seemed only proper to hold on, if need be a year, for sooner or later prices must come back. But the break "shook them out," and prices just went so much lower because so many people had to sell, whether they would or not.

The spectator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day -- and you lose more than you should had you not listened to hope -- to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out -- to soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.

- Bill Lipschutz

I don't have a problem letting my profits run, which many traders do. You have to be able to let your profits run. I don't think you can consistently be a winner trading if you're banking on being right more than 50 percent of the time. You have to figure out how to make money by being right only 20 to 30 percent of the time."
Mechanical Trading Systems - Expert Citations

George Soros - I don't care when I'm wrong. I cut my losses and move on to the next opportunity. It's about how much you make when you're right.

 

[Splitlink]

One of the problems that the trader has to resolve is to make a calculated decision on where the majority of the stops are.

So many systems , such as 123, and plenty of respected posters, too, suggest the bottom of the previous low, etc. etc. that it is a dead certainty that those areas are going to be taken out by the marketmakers. In fact, IMO, it is an invitation by traders who put their stops there, to get them triggered.

After all, it is not only his stop that is there, but those of, literally, thousands of others as well. One clean sweep and Wow!

No wonder the MMs and SBCs are filthy rich! SBCs don't need to fiddle to get the traders money. It is, practically, given to them by the traders, themselves.

So the budding trader (and not so budding) has, probably got himself a nice system that should work, then puts his stop where informed TA opinion tells him to!

A poster named Steve, on LM's "3 Keys" thread was on the right track, when he suggested having the nerve to hold for a reversal, instead of closing. That takes a lot of nerve, indeed, but there is some truth what he said. There, quite often is a reversal. But, if it keeps on going down, where do you call it a day?

I'm afraid that we are all in the same boat. You pays your money and you takes your choice!

Maybe the best choice is to try to figure out where all the stops are and put a limit order to buy, with another stop below that?

Split

 

[firewalker99]

A poster named Steve, on LM's "3 Keys" thread was on the right track, when he suggested having the nerve to hold for a reversal, instead of closing. That takes a lot of nerve, indeed, but there is some truth what he said. There, quite often is a reversal. But, if it keeps on going down, where do you call it a day?

Having the nerve to hold on to a losing position might have more to do with the unwillingness (ego?) of the trader to give in to the market and admit he's wrong. If he knows what to do on what signal, there should be no "having the nerves"-thing involved.

But we've been through this before, as you rightly say, in the Three Keys thread...

 

[black bear]

Pinkpig confused..................Real Life

I totally agree.

That is exactly what my stop loss is there for.

I buy a breakout for the sake of argument.

Before I enter my trade I know where price is going to allow me to exit this trade as a loser, lets say somewhat beyond a previous swing low, or as a function of volatility / ATR, etc.

If I am taken out I am taken out and it's no big deal at all.

But I have been disciplined and taken a loss that is always roughly the same size percentage wise of my account, I always lose say 2% when I lose, whereas when I win on average it's always a multiple of that, because on average my winners are many multiples larger than my losers.

This way I can be "wrong" way beyond 50% of the time, and yet be very net profitable.

I think it is exactly this way of trading that totally discounts emotions, you just do not care about hit rate or the individual trade at all, all you care about is your long term edge and your net profits.

Hit rate most definitely is not in any way success relevant.

Show me a trader who is "right" anything way over 50% of the time, and who does not achieve that via stop losses that are larger than their take profits, meaning it's more of a feel-well strategy than anything else, but it most decidely is not about the bottom line.

Besides, systems that are right more often than they are wrong are decidedly less net profitable than their lower hit rate brethren:

Brett Steenbarger:

"...As a rule, maximizing batting average/minimizing drawdown comes at the cost of lowering overall system profitability...."

"William Eckhardt:

The Win/Loss Ratio
“One common adage on this subject that is completely wrongheaded is: You can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of a gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance. …

What really matters is the long-run distributions of outcomes from your trading techniques, systems, and procedures. But, psychologically, what seems of paramount importance is whether the positions that you have right now are going to work. Current positions seem to be crucial beyond any statistical justification. It’s quite tempting to bend your rules to make your current trades work, assuming that the favorability of your long-term statistics will take care of future profitability. Two of the cardinal sins of trading - giving losses too much rope and taking profits prematurely - are both attempts to make current positions more likely to succeed, to the severe detriment of long-term performance.”
Market Wizards

Finally, not to forget what are probably the two single most important factors one needs to fully understand in trading if one wants to make it, let alone make it big:

A: Mark Douglas excellent and very common-"sensical" observation that anything can happen anytime at all in markets overthrowing your clever analysis, all it takes is one big order going against you and triggering your stop loss.

B: Kenneth Grant, in "Trading Risk: Enhanced Profitability through Risk Control", depicts his experience as risk manager for some of the best and most successful hedge funds, amongst others Paul Tudor Jones funds and Steve Cohens SAC Capital, that:

ACROSS ALL TRADING STYLES, TIME FRAMES AND TRADERS, ONE RULE HOLDS TRUE:

10% OF ALL TRADES INEVITABLY ACCOUNT FOR 90% OF PROFITS !

Thing is, some wise guys might now assume that there is sthg they can do to improve that division of labour, through trading less, or working harder, or coming up with better analysis / systems whatever.

Problem is, doesn't work that way in real life.

In real life the law seems to be that it's pretty much always 20% of input that generates 80% of output, which is really all you need to concentrate on to achieve outstanding success, while in trading it's just a bit more extreme, 10% of input generates 90% of output.

This is my attitude, too. If the trader is confident of the direction that he thinks the market is going to go, why take a large loss, when a smaller one one will give the opportunity of buying back, lower down, and recouping the loss he made earlier?

Taking large losses removes one of opportunities that the trader has of recouping and taking his general plan into profit or, at worse, breaking even.

However, I will admit to misgivings at times, when I have taken a string of small losses.

Split

Position Sizing!!
Now this term has come up several times for my benefit and maybe others could someone please expand on this further. I know I will learn something from it.

Thanks

Hi all

Pinkpig just returned from last orbit of the moon

Thanks for rep pt FW for..............develbis ftse thread post

25 total trades, a few days = none, one day I think 4

21 wins
4 lose
SR 84/16%

av win 8.23 pts
av lose 7.50 pts

Coms paid on trades put the av win 1.5 pt behind av win but achieved usual high strike rate so very happy with 1st month.

BSD

guess your talking to me indirectly :?: im here :clap:

All your posts are, well perfect advice IMO = textbook and I for one have learnt plenty from them and they have given me food for thought plenty of times.

Even the T shirts are good

above are my last months figs, so you can see I have some problems that require urgent attention, :-0

I would point out that ~

I managed to pull back 2nd bank from 50% drawdown in what was my dark "est hour and then went on to double another bank, I am not bragging and if I am trading with an in-correct method I would like to get to the bottom of it ~ NOW

I have lurked and posted on T2W for some time, Split attributes it to my search for the Grail :drunk: I need no grail and have only a passing interest in what others do these days, according to your post and to be honest that of others BSD I do it all wrong and have done since I became profitable, its that or I observe the rules guidlines without realising it which I concede means the confidence to play at real size is not there at the moment.

Saying that have just taken 2 trades while writing this and exceeded my partners earnings for the week in 5 mins and 30 seconds so not messing about at all IMO

Some info from my horse racing days, sorry only goes from 25%-80% SR

25% SR =10% chance of losing run of 9 times 2% of bank 5% chance of losing run of 11 and a 1% chance of losing run of 17

to be on the safe side, life being what it is ~ you should allow 2 of the above such runs to come close together :-0 after all you only have one real bank dont you,:?: if its any proper size that is or your just starting out.

I guess you can see where I am comeing from ~

Drawdown is rather large IMO or could be very easy IMO at the low SR end of the range :?:even if you get some big wins to compensate you, if your down 30% of capital thats some confidence in your method IMO, I sure would be questioning myself with real money I can tell you (not 30% of a grand, a bit bigger)

Do I have experience of what I am talking about ~

unfortunately yes at 24 I aspired to be a big shot backing horses, I was on at 5-8/1 range animals

when the losing run came

och ! I got out alive and only gave back previous win money, that was the good luck

the bad was un believable at that SR end of the spectra :-0 it went on and on and on and on and on, pretty much as long as this post

80% SR = 10% chance of 2 losers in a row 5% chance of 2 losers in a row and a 1% chance of 3 in a row

You point out or you let the quoted books etc point out the problem of using an wider stop that is larger than the profit target, which on paper sounds correct, I am not a wizz with numbers I have just dropped what does not work along the way or that I do not need etc, my goal

To make money to live on or at least enough to make trading very worth while

I am no wizz with numbers, I can carry out basic calcs etc, my accountant once said and I think it was very good advice and have always worked along these lines

"What I like to see is a business thats receipts for work done are of varied size not just a couple of stand out receipts"

I agree that 20% of work done accounts for a large amount of the profit, its not luck your method must have enough flexibility/skill in it IMO to allow the odd one to run on after you encounter a bit of good fortune, something you fail to mention in your post and previous posts BSD which does concentrate on the downside of the argument IMO, the flip side is I have some great winners to.........

fortunes of war

I have after 2 years a pretty good idea of how many 25 pt stops (HARD) get hit and under what circumstances I also have a pretty good idea how to respond if the entry I have just taken skips past my profit average in quick order (I wrote down in the 1st place what I would do, and now its more automatic and always under constant scrutiny)






Hi Split

"This is my attitude, too. If the trader is confident of the direction that he thinks the market is going to go, why take a large loss, when a smaller one one will give the opportunity of buying back, lower down, and recouping the loss he made earlier?"

My take on this is, well the 1st thing that came into my mind when I read it was ~

why would you enter a trade at a size that does not allow you to hold till your wrong :?: sounds like your running after the market, I now you were only using an example probably fictitious Split

I would see the market direction same as you but look where it will run out of steam = an ambush, then ask is that ambush in line with the longer term trend and what factors are in the proposed trades favour and what price action I would want to see at that location etc.

That"s about me done, I would appreciate all thoughts on this, I am a painter by trade and not great with figs and all that backtesting stuff

I am always looking to improve and help others improve to.

Good trading all :clover:

I have landed now so you only get the moon, well you have to come back to Earth at weekend, need a couple of :cheers::drunk: after all that hard mouse work

 

[chump]

I use 'mental' stops during trading hours and hard stops outside hours where outside hours simply means I cannot trade/monitor for whatever reason. I'm cognizant of the volatility of the instrument when I do this as I don't want stopping out of a good trade because some boob somewhere caused a spike.
My stops are technical and position size /risk is subordinate to that. On aggregate though I find I rarely get stopped out. Typically I exit before the stop when I sense the trade is simply not acting to the 'expectation I had when I entered. I might stress this is not an emotional reaction to a trade moving against my entry. I have no issue with that as long as it is not outside my 'expectation'. Price just starts doing something which does not appear 'right' and if I see that I exit immediately.
For example I was short the other day a UK stock when the market tanked and this stock barely flinched ! To me I should not be technically short on a stock that can show that type of strength. Who knows ,it may behave 'right' now ,but I'll monitor that to see what happened.In that sense whilst I don't like losses I do accept them as part and parcel of trading and I'm a little more positive than that when a loss leaves me with some extra piece of information that I did not have before.