Money Mgmt beats Stops Everytime - Example
- Thread starter ProfitTakgFool
- Start date
Exactly Pholeuon! Thank you for the clarification, there's a big difference. Every order I put on the market has an OCO attached but the stop is away. I leave it hanging out there for a time I need it, and there are definitely times I need it!
OP is right, you can trade with no stops and still manage risk. you do that by decreasing your size as the position goes against you
I do that for position trades but as far as daytrading goes you need stops, the commission costs will be greater if you use sizing to manage risk plus the stop will save you when the market gets hit by news and your not looking or your machine crashes
I do that for position trades but as far as daytrading goes you need stops, the commission costs will be greater if you use sizing to manage risk plus the stop will save you when the market gets hit by news and your not looking or your machine crashes
I did try that and I had a 65% win rate and stops were mandatory. I win over 90% of the time this way. I like this better. As I mentioned in the opening thread, there are many ways to skin a cat. What works for me may not work for you, or vice versa. Just do what works.
Quote from balda:
On your chart market makes lower lows and lower highs and you keep on buying?
Try opposite and stop will make much more sense.
These are some very valid points. Technology failures have to be planned for and adverse news has to be planned for so you need to take your max risk tolerance and decrease it for "shit happens." I've had the news thing happen to me. The technology thing hasn't <b>yet</b> but that's because I've taken a lot of precautions so it doesn't.
Oh and ahhh....if 9/11 part 2 happens I'm screwed but aren't we all? If you live with that fear you should never even put on a trade -- Ever!
Oh and ahhh....if 9/11 part 2 happens I'm screwed but aren't we all? If you live with that fear you should never even put on a trade -- Ever!
Of course not. Sit quietly for 120 seconds and ponder the question "Name 3 types of traders who would not be grievously wounded by 9/11 part 2". If you need inspiration, thumb through the tables of contents of the Market Wizards books and ask yourself "What happens to this strategy in a 9/11 scenario?"
I have done some research on stops as well, and I classify two types of stops: static and dynamic.
Static stops are stops that don't really vary based on position. I chose 5%, 10%, 2ATR and 3ATR both static and trailing stops.
For my test, I chose random points in time on the S&P 500, went long, randomly chose an exit point, and put on a stop. If the stop got hit and the position went lower, the signal was given a 1 (the stop was successful). If the stop got hit and the position ended up going higher than the stop, the signal was given a -1. I did this 10,000 times for each test case.
In all eight testing cases, the 95% confidence interval for the true mean was below 0. This means one thing: randomly placing stops only hurts. These are the types of stops Wall Street generally tells you to place for the sake of conservation of capital. The 5%. The 10%. The 2 and 3ATR stops. The trailing stops. News-flash: They all do more harm than good.
That does NOT mean, however, that dynamic stops aren't effective. I have seen over and over again how stops placed below psychologically significant areas, below trend lines, and below points of buying interest help to significantly reduce risk. These stops have nothing to do with percentages or pre-defined ATRs ... they have to do with recognizing when the status quo has changed.
Stops are smart. It is just all about how you apply them.
Static stops are stops that don't really vary based on position. I chose 5%, 10%, 2ATR and 3ATR both static and trailing stops.
For my test, I chose random points in time on the S&P 500, went long, randomly chose an exit point, and put on a stop. If the stop got hit and the position went lower, the signal was given a 1 (the stop was successful). If the stop got hit and the position ended up going higher than the stop, the signal was given a -1. I did this 10,000 times for each test case.
In all eight testing cases, the 95% confidence interval for the true mean was below 0. This means one thing: randomly placing stops only hurts. These are the types of stops Wall Street generally tells you to place for the sake of conservation of capital. The 5%. The 10%. The 2 and 3ATR stops. The trailing stops. News-flash: They all do more harm than good.
That does NOT mean, however, that dynamic stops aren't effective. I have seen over and over again how stops placed below psychologically significant areas, below trend lines, and below points of buying interest help to significantly reduce risk. These stops have nothing to do with percentages or pre-defined ATRs ... they have to do with recognizing when the status quo has changed.
Stops are smart. It is just all about how you apply them.
Very interesting research and I couldn't agree more. Random stops create a series of small losses but no stops leave you open to one massive loss, which can be equally as destructive. Trading is an art, not a science, and it should come as no surprise that knowing how and when to use stops is also an art.
This morning the S&P and NASD e-mini's did a huge headfake before plunging to their current depths ...
Now, provided one has adquate risk management parameters in place (only risking X contracts with Y amount of dollars:1 emini per $5k or $10k as an example) and [very important] you are willing to cut your losses when the conditions which caused you to enter the original trade have changed, this is, in all likelihood, the superior way to trade, as compared to using fixed stops (which as you guys have ALL noticed, tend to get picked off left and right before the market cotinues its move in the direction of the trend)..
Thank you for your contributions to the site PTF ... the really good ones are few and far between.
Now, provided one has adquate risk management parameters in place (only risking X contracts with Y amount of dollars:1 emini per $5k or $10k as an example) and [very important] you are willing to cut your losses when the conditions which caused you to enter the original trade have changed, this is, in all likelihood, the superior way to trade, as compared to using fixed stops (which as you guys have ALL noticed, tend to get picked off left and right before the market cotinues its move in the direction of the trend)..
Thank you for your contributions to the site PTF ... the really good ones are few and far between.
Trading has science (fixed, analytical) and art (intuitive, mutuable) aspects to it, as do most of the creative endeavors.