Is a stop-loss strategy sound?
- Thread starter garfangle
- Start date
Quote from opw:
only if the stop is too tight...
No stop means an indefinite risk for short positions, and a maximum loss of the value of your stock for long positions.
How do you make money if you size your position so that 2% risk is the value of your stock? If a stock increases 100% you only make 2% of your account.
In other words, how can you 'size' your position if you do not know what your maximum loss is going to be?
Only long sys
eg. I have an account of $100,000 and my bet is $5000 on any position so my risk is a 5% loss of my capital, but the worst case in 10 years of backtesting is a loss of $2500, so actually i'm theorically risking 2.5 % on any position.
My sys has a win rate of 85% and produces on average a trade a day and average trade profit is $250 .
But if I apply a stop loss my avg trade profit is $100.
So now my return is about $25000 every year instead of $50000 and my drawdown/return ratio is dramatically increased.
Would you apply a stop loss to a system like this?
And if you're wondering , yes these are rounded numbers from a sys I trade.
As you can see there's nothing sure when talking about trading.
Too many parameters to write a law about stop loss
Always IMHO
Live in hope, die in despair, remember DrKoop.com. If you get stopped out of a trade, unless you have the incredible bad luck to hit the exact top or bottom, if you so choose, you can always get back in, usually at a better price. At worst, you will do better half the time and worse half, and it will even out, while still protecting you from catastrophic losses. If, for example, you had been stopped out of futures on Ten-years recently at 120, if you were a real masochist, you could have gotten back in at 119, 118, 117, 116, 115, 114, 113, 112, 111, or 110, and in each case, you would have had less of a loss than if you held on and waited for the market to come back. Of course, if you had just gotten stopped out, had a beer, and gone to the Bahamas, you would have saved about $10,000/per contract, easily paying for the trip. And, while the leverage magnifies the losses in futures, anyone who trades stocks knows after the last few years that they don't always come back and give you a better exit. If you thought your stop placement through for reasons of analysis and sound money management, then leave it alone. If you are getting stopped out a lot, and then the market is rebounding right back, then I would look at my specific stop strategies, not whether stops in general are a bad idea. Just my 2 cents worth......
Jessie
Jessie
Unfortunately garfangle, there are no guarantees that something is going to happen in markets. So just holding onto a loser 'cos you "just know" you are right, or because the market "has to" do something, can, and most likely will, eventually, blow you out. So stops, especially "badly chosen" ones, while they certainly can leave you standing while the market runs away on you, do save your hide from all but certain disaster (in the LR). Tough, but that's just the way it's got to be.
Theoretically you may be right about stops, but in the real world -- where trading actually takes place -- such theories are about as useful as yeast infections.
Theoretically you may be right about stops, but in the real world -- where trading actually takes place -- such theories are about as useful as yeast infections.