How do You set your Stops? Got favorite ideas?

[Tradex]

You can't know the optimal stop ex-ante.

A thorough backtest (1 000 or 2 000 historical trades for instance) will show you the optimal stop, period.

budget stop should be how much you are willing to risk on any trade x confidence

The market does not give a hoot about the amount of money we are willing to risk, so the only way to solve the problem is to look for the optimal stop AND the optimal % of money that we should risk per trade.

Trading is a mathematical game, so the trader must know - IN ADVANCE - the optimal parameters to use for maximum profit and minimum drawdown, any other way of trading will always produce inferior or negative results.

 

[longandshort]

A thorough backtest (1 000 or 2 000 historical trades for instance) will show you the optimal stop, period.

The market does not give a hoot about the amount of money we are willing to risk, so the only way to solve the problem is to look for the optimal stop AND the optimal % of money that we should risk per trade.

Trading is a mathematical game, so the trader must know - IN ADVANCE - the optimal parameters to use for maximum profit and minimum drawdown, any other way of trading will always produce inferior or negative results.

I'm sorry but you don't know what you're talking about. Risk management systems everywhere from Goldman Sachs to Citadel don't predict an optimal stop price. They allocate capital (add and remove) to traders based upon drawdown %, the volatility of drawdowns, and risk budgeting. These concepts are rooting in gambling theory and extensions of it, such as the Kelly critera and monte carlo simulation. There is no optimal stop price for a stock because stocks are non-stationary geometric random walks with drift based upon risk premia (beta) and errors (alpha).

If you are a mathematical person, then you would be aware of the supremacy of using log changes to evaluate prices, known issues with gaussian distribution (which is why standard deviation is not super useful, though still better than not), and the role of risk budgeting in establishing an optimal allocation.

 

[Tradex]

There is no optimal stop price for a stock

Did I say that?

I said each (purely mechanical) trading system has its own optimal stop.

This stop could be a hard stop or a dynamic stop (based on volatility, ATR or whatever) but one thing is for sure: no trading strategy can survive without a fail-safe mechanism.

Risk management systems everywhere from Goldman Sachs to Citadel

Let's just say that these whales/sharks use different methods to make money.

 

[d08]

??

Trading with no stop means you are willing to lose 100% of your capital.

That has a foolish implication that your position size is 100% of your capital. I recently took a 60%ish loss on a 20% position, far more than I would have liked or was even in the plans but it didn't decimate me as 100% position would have.

 

[d08]

This stop could be a hard stop or a dynamic stop (based on volatility, ATR or whatever) but one thing is for sure: no trading strategy can survive without a fail-safe mechanism.

I made most of my funds while trading without stops, this over many years. So it's definitely possible.

 

[Tradex]

I recently took a 60%ish loss on a 20% position

Sure, but on highly leveraged financial instruments a sudden and unexpected move against you (say a 3-day limit down move on Orange Juice futures) could empty your trading account faster than you can say "margin call Gentlemen".

 

[longandshort]

Let's just say that these whales/sharks use different methods to make money.

Let’s just say those traders have robust risk management.

Some folks use atr or volatility adjusted stops, but they understand that it is not optimal, they just prefer a simpler way to set a risk budget. The concept of a stop loss, or limiting losses, is rooted in gambling theory. Your bankroll and edge determine your risk.

 

[taowave]

Walk Forward Analysis..

WFA?

 

[Tradex]

I made most of my funds while trading without stops, this over many years. So it's definitely possible.

I could look at your system, find its optimal stop and double your profits while reducing your drawdown by 25%.

Do you think that's possible, too ...?

In other words, how do you know you are trading the optimal way with this no-stop strategy?

Think about it.

 

[d08]

I could look at your system, find its optimal stop and double your profits while reducing your drawdown by 25%.

Do you think that's possible, too ...?

In other words, how do you know you are trading the optimal way with this no-stop strategy?

Think about it.

Because I've analyzed the strategy for a large number of stop methods and while some offer a slight benefit, they also offer larger slippage. On a net basis there's really no benefit except psychological and that's why I currently use stops.
The idea that it's so easy to find an optimal stop is funny because that's far from reality. It depends entirely on the strategy itself. What if it's trading relatively large positions on low liquidity instruments at closing auctions? The slippage on any stop strategy would be large and most likely negate any performance improvements.