Is a stop-loss strategy sound?

[resinate]

Quote from damir00:

the simplest, most obvious is a time-stop. open for X bars (minutes, hours, days, whatever) and then out. i don't understand the fascination with price-based stops.

(almost) everybody here is using them, (almost) everybody here is losing money.

The facination with price is simply due to price determining amount of loss. Time has no connection with preserving capital.

Nearly 100% of everyone here uses computers to trade and 95 % lose money.....

Just because it is a commonality, there is no reason to assume causality.

 

[alfonso]

Quote from damir00:

the simplest, most obvious is a time-stop. open for X bars (minutes, hours, days, whatever) and then out. i don't understand the fascination with price-based stops.

(almost) everybody here is using them, (almost) everybody here is losing money.

Ok. It doesn't matter to you at all what the price level is during the time your position is open?

You buy at 990, plan to "stop out" after 15 minutes, but in that 15 minutes the price drops to 960 -- unlikely, but certainly possible -- and you would do nothing?

I can imagine how on a "minutes" basis this could be possible, but "days"? A 10 day "time stop", come what may? Time enough for a stock to lose 50% of its value? (Again, not likely, but possible). I find that very hard to believe.


I can only think that someone that trades this way thinks his time stops are of such a high quality that the probalility of price moving against him by any "extreme" amount is negligible but that doesn't really speak so much for time stops as it does for one's ability in using them.

 

[RAMOUTAR]

Initially I used mental stops. When I started trading no one offered SLOs for naz stocks. When technology permitted, I used them all the time. The advent of SLOs on naz was bittersweet because I would get stopped out on real killers, and get wiggled out on winners as well.

This all changed for me when I added "slippage margin". Lets take KLAC for example. It's very whippy and on its best days, the price levels are very thin. Whenever I swing KLAC, I always add more cushion on my stop (around 10 cents), this will reduce a risk reward ratio from 1:2 to 1:1.5, but well worth it. With AMTD I only need to add 3-5 cents. When I scan, I evaluate the stock's Level II movement. If the price levels are thin, I add more to the stop for slippage, if there’s too much slippage I don’t swing trade the stock, but daytrade it. If you’re trading ETFs or SSFs it’s obviously a different ball game,

SLOs are a great tool, especially for swings. My opinion is that if anyone has a tough time entering their mental stops, they should use physical stop loss orders. The cost of slippage is nothing compared to freezing at the moment of truth with a mental stop.

 

[damir00]

Quote from alfonso:

You buy at 990, plan to "stop out" after 15 minutes, but in that 15 minutes the price drops to 960

if you think your stop loss is going to save your bacon with the spoos falling 2 pts a minute, you're sadly mistaken. overnight is even worse, the market could easily gap right past your stop loss and take your long to zero or your short to 1000.

the ONLY way to keep money safe is to keep it out of the market. stop losses do not prevent catastrophic losses.

 

[damir00]

Quote from resinate:

The facination with price is simply due to price determining amount of loss.

it is trivial to demonstrate that price-based stop losses do not do that when the danger of loss is exactly highest.

Time has no connection with preserving capital.

neither do stop losses.

Nearly 100% of everyone here uses computers to trade and 95 % lose money..... Just because it is a commonality, there is no reason to assume causality.

bad example. without computers most losing money in here would not be able to lose it so quickly, and in the markets. linked indeed.

 

[alfonso]

My question to you was about whether or not you care about the changes in the price level while "time stop" has still not activated?

If you're going to disparage price-based stops, then at least be willing to explain why your alternative is better, no?

 

[resinate]

Quote from damir00:

....it is trivial to demonstrate that price-based stop losses do not do that when the danger of loss is exactly highest...

Sure. However the concept is more flexible and sound than a time stop for protective purposes.

For example, I trade spx options- not liquid, subject to gaps and periods when one can't get an accurate price or electronic execution. Physical stop losses can be deadly with the huge spreads. I always have a mental price stop for the underlying. If the underlying hits it, I exit the option position if possible given cboe conditions. If not, I hedge using something liquid like spy or ES. Yes there will be some loss but the alternative of no stop loss point or a time stop could be fatal.

If you are trading something where you cannot take effective measures to protect yourself you should not be trading it IMHO.

 

[opw]

I don't understand the fascination with price-based stops.

(almost) everybody here is using them, (almost) everybody here is losing money.

It is really great how you seem to find a connection in probably unrelated things.

Most traders wake up every day. And most traders lose money trading.

Since I realized this I have stopped waking up. I had my best year ever. No losing trades at all!

It really works, try it. I would backtest it, but then again, I would have to wake up. And I try to be disciplined about my newly found insights.... Cause next to not waking up, I think discipline is one of the most important traits of a trader.