Stop Losses

[BSD]

As I said earlier, 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, you're a good guy, but, to be honest, I think that's total nonsense.

Pretty much all of the Market Wizards agree with my assessment, but nobody made the point more succinctly than Bruce Kovner, who is a Billionaire these days running Caxton Associates, his Billion dollar hedge fund:

"- 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."
Mechanical Trading Systems - Expert Citations

Eg when I am trading a double top that's what I trade, and that's it.

If it turns into a triple top I can reenter, but I still have one loser.

What's the big deal.

 

[dbphoenix]

And if one substitutes " when I exit the position" with "place a predetermined stop", fine. And if you want to believe that what i've said is nonsense, that's also fine.

But the markets are dynamic, and to think that placing a stop marks the spot where one is wrong for the full duration of the trade is naive. The dynamics can change within seconds. Or minutes. Or weeks. And even though one's "stop" was absolutely correct at the time of the trade, it can be absolutely incorrect shortly thereafter.

As for Bruce Kovner, I'm glad he's doing so well. But that has nothing to do with how I manage a trade. Sorry.

 

[BSD]

DB, we must be talking at cross ends here.

I mean, of course markets are dynamic and all that, but give me an example of what you mean.

Lets say I'm trading a 2B, a double top where the right leg slightly breaks out beyond resistance of the left leg.

The minute we reenter below the level of the left leg I go short - just as an example.

For me, I am short until I am stopped out at a loss immediately above the right legs resistance, and that is exactly where my stop loss remains until I move my stop loss down to breakeven which I do as soon as warranted, or, eventually, with a trailing stop that exits my trade with a profit.

But that's how I handle a typical trade like a double top:

1. Stop loss = Exit with 1 R loss

2. Break Even Stop Loss = Scratch

3. Trailing Stop = Exit with Profit

 

[dbphoenix]

If you're describing what i think you're describing, that's not a 2B. But, be that as it may, one might take the position that there's no reason to hold onto the trade if it does not move immediately in the direction one thought it was going to take. To sit and watch the trade move all the way back up to the stop before one acknowledges that his entry may not have been all that it should have been is to abdicate responsibility for the trade. This is not a matter of being frightened out of a good trade but of continuing to evaluate market conditions throughout the process.

 

[BSD]

This is what I mean by 2B:

It's the other way round now to my example above, ie this would be a long trade.

But OK, nothing else has changed.

I enter with a long once we re-enter the zone of the left leg - or, more conservatively, once the breakout down has failed, we go above the high of some bar like where on the pic they have an X - and stick my initial stop loss right below the swing low on the right.

And for me there just aren't any revelant dynamics that get me out of my stop loss until that low on the right gets taken out, where I have my stop loss, or, if the trade keeps going in my direction, I trail my stop to a breakeven, and, from there on, to a profit.

Either I exit with a loss, with a scratch, or a profit per trailing stop / target.

But I totally fail to see how else you want to manage that.

 

[dbphoenix]

Well, managing it would not be an issue for me since I wouldn't be taking it in the first place. But, if for some reason I were to take it and price didn't immediately advance, I wouldn't hang around and wait for my stop to be hit. I'd exit the trade.

 

[BSD]

Well the 2B was just intended as a representative for price patterns, my reasoning being that the only reason to trade a price pattern or enter a trend or try catching a reversal or take a volatility breakout etc etc is because you believe one of three things can happen, you can end up with a loss proving you wrong, you end up with a scratch if price advanced far enough in your direction so that you could pull your initial stop loss up to breakeven, or you hope that your edge will assert itself and you have a winner on your hands turning you a profit.

That's all trading is to me.

Now you've mentioned something that does make a lot of sense though:

price didn't immediately advance, I wouldn't hang around and wait for my stop to be hit. I'd exit the trade.

If I understand you correctly, another arsenal for you would be a time stop.

OK, that's a very valid point. I don't use em myself, prefer giving trades time to sort themselves out, but I do see that they can be a very good instrument if that fits your style.

 

[dbphoenix]

Actually, it's more than just three things. If the trade isn't doing what I thought it would do, I can take an immediate loss of a few ticks, wait for the stop to be hit and incur a larger loss, breakeven, take profits sooner than I had anticipated, take greater profits later in the trade, etc.

As for the time stop, I know what you mean, but no. If, for example, price recoils immediately, then something is going on that I did not anticipate, and I don't want to be there, even if it means re-entering almost immediately. My abllity to make money hinges on my being able to read the market correctly. If I've misread it, I don't want tohave to pay dearly for the error.

 

[laptop1]

Well, managing it would not be an issue for me since I wouldn't be taking it in the first place. But, if for some reason I were to take it and price didn't immediately advance, I wouldn't hang around and wait for my stop to be hit. I'd exit the trade.

You must be trading tick chats then, daytrading/scalping.

 

[dbphoenix]

I daytrade, but I don't scalp. But none of that is pertinent to my wanting to see price move immediately in the desired direction. But, again, if it doesn't, the trade isn't necessarily over. I may re-enter fairly quickly. To repeat, the market is dynamic, nothing is guaranteed, and one must continually assess conditions.

 

[BSD]

Actually, it's more than just three things. If the trade isn't doing what I thought it would do, I can take an immediate loss of a few ticks, wait for the stop to be hit and incur a larger loss, breakeven, take profits sooner than I had anticipated, take greater profits later in the trade, etc.

As for the time stop, I know what you mean, but no. If, for example, price recoils immediately, then something is going on that I did not anticipate, and I don't want to be there, even if it means re-entering almost immediately. My abllity to make money hinges on my being able to read the market correctly. If I've misread it, I don't want tohave to pay dearly for the error.

DB, we're totally going in circles here, particularly as you are not coming up with any examples to support your idea.

That is why I came up with the 2B trade.

The only time you know that the pattern is invalidated is when the second swing low, ie the lowest low on the right, is taken out with an even lower low.

And that's where you have your stop loss.

Before and UNTIL that happens it is a perfectly valid pattern, and absolutely no reason exists to exit.

The way I would manage that trade is initial stop loss below swing low on right.

That stays until I pull my SL up to breakeven.

I pull my stop loss up to breakeven once my paper profit is roughly two times the size of my loss.

After that, I trail my profits.

We'll just need to disagree on this.

 

[dbphoenix]

DB, we're totally going in circles here, particularly as you are not coming up with any examples to support your idea.

That is why I came up with the 2B trade.

The only time you know that the pattern is invalidated is when the second swing low, ie the lowest low on the right, is taken out with an even lower low.

And that's where you have your stop loss.

Before and UNTIL that happens it is a perfectly valid pattern, and absolutely no reason exists to exit.

The way I would manage that trade is initial stop loss below swing low on right.

That stays until I pull my SL up to breakeven.

I pull my stop loss up to breakeven once my profit is roughly one time the size of my loss.

After that, I trail my profits.

We'll just need to disagree on this.

Okay, example:

Assuming entry at "X", I'd be out.

 

[BSD]

Okay, example:

Assuming entry at "X", I'd be out.

Aha.

So you're a scalper then.

Well, I mean that's fine then too.

 

[dbphoenix]

Aha.

So you're a scalper then.

Well, I mean that's fine then too.

No, again, I am not a scalper. If the price had moved as expected, I'd be in the trade until price reached R, which might be several hours and many points later.

 

[new_trader]

Are stop losses any good?
In my early days I would follow the norm which I believed was 30 points I would see my position turn against me hit my stop loss and go my way, After begining to think it was a personal issue the market wanted my money (yes this 1.3 trillion market was conspiring against little old me)
I raised my stop loss to 50 points and the market still cheated me
Raised it to 100 points and now all the banks, hedge funds and private investors got in on the action took my 100 points and then went the way I originally expected

Now I never trade before an economic-news event.
Do not set a stop loss
If I set my entry/exit parameters right it might go down 200 points but it will come back up and let me come out at B/E or a small loss.
I know people will say it depends on how deep your pockets are.
Not very deep really
I aim to make 25 to 30 points a day times my stake, I treat trading as a job
As I am sure a lot of us do
Expecting Realistic returns on your capital, dedication lot of hard work
And taking few knocks should make you more than the average u.k salary

But would like to hear others views and experiences with stop losses.

This is why it is essential to trade with tight stops until you become proficient.

 

[BSD]

DB well you can call it what you will, but to me you're just choking off perfectly good trades without giving them a chance to develop to their fullest potential.

Nothing goes up in a straight line, nor does it need to provide great profits.

 

[dbphoenix]

DB well you can call it what you will, but to me you're just choking off perfectly good trades without giving them a chance to develop to their fullest potential.

Nothing goes up in a straight line, nor does it need to provide great profits.

Again, I'm choking off nothing. If the dynamics called for it, and price were to resume the advance, I'd re-enter. I prefer that to sitting on my hands and hoping. It's also cheaper.

 

[firewalker99]

This is why it is essential to trade with tight stops until you become proficient.

There are already some disagreements on this thread, but I'm inclined to add another one... tight stops can lead to the proverbial "death by a thousand cuts". Placing your stops closer because you don't have enough money to lose, is just waiting for them to be taken out.

The only thing you should be doing until you are proficient - imho - is not putting real money on the line.

 

[Rhody Trader]

This is why it is essential to trade with tight stops until you become proficient.

Nooooooooooooooooooooooooooooooooooooooooo!!!

You may very well have something different in mind, but when a new trader reads that they take it literally. As a result, they put their stops so close as to be within the bounds of normal volatility and basically assure themselves of their stop getting hit. Basically, they increase their risk, not decrease it.

New traders should trade with stops appropriately placed based on their strategy (assuming their strategy even employs them) and undersized positions. Trading small is what reduces risk, not tight stops.

Edit: Whoops! Firewalker99 beat me to the draw there. Either way, the point is made.

 

[dbphoenix]

Trading small is what reduces risk, not tight stops.

As well as getting the entry right.

(Uh-oh, the exits-are-everything-entries-are-trivial people aren't going to like that )