A hard, fixed stop might not be the ideal way to exit a losing position, but it is certainly better than riding that losing position down.
Stop Losses are for Losers
- Thread starter chewbacca
- Start date
You know what amazes me is that there as many types of trades and trade management as there are traders. I guess the point to this whole thread is that a trader has to find out what works for him/her and be consistant with that strategy. Its is probably not fair for anyone to comment on another traders strategy until they know exactly how much money they are trading with, what are their entry/exit criteria, etc. What works for one trader might not work for another due to personality, mind set, or trading history. One final thought is that because of the nature of trading, every trader has to believe 100% in their on particular strategies or they wouldn't be able to trade. Therefore, each of us are very passionate about what we do. IMO.
Wow. What a flamefest. While I'm not sure anyone is listening, here's my take:
I day trade FX. I want to be flat at the end of my day.
So while price usually comes back, I want it to come back in the next several hours at most. If it breaks the short-term trend that gave me my entry, I'm out via my stop loss. It's positioned so that a hit means reversal, not noise. No biggie: my position size is such that it's tolerable.
Crucially though, I hate those stops being hit with a passion. Four times out of five, long before they are hit, the market stalls with all the price action signs of impending reversal, or possible but not definite continuation. So I get out before the stops are hit for small profit or breakeven.
Don't let having your stops in place be an excuse for laziness. You must watch the unfolding market action like a hawk, and when there is little potential remaining in the trade, or the initial conditions that made you take the trade no longer hold, exit. So my stops are a long way away from the market and rarely get hit.
So in summary: have wide stops placed with due consideration for market action, never in arbitrary places. Don't overleverage. Watch the action unfold with a surgeon's care and take action to exit when appropriate.
magicdust
I day trade FX. I want to be flat at the end of my day.
So while price usually comes back, I want it to come back in the next several hours at most. If it breaks the short-term trend that gave me my entry, I'm out via my stop loss. It's positioned so that a hit means reversal, not noise. No biggie: my position size is such that it's tolerable.
Crucially though, I hate those stops being hit with a passion. Four times out of five, long before they are hit, the market stalls with all the price action signs of impending reversal, or possible but not definite continuation. So I get out before the stops are hit for small profit or breakeven.
Don't let having your stops in place be an excuse for laziness. You must watch the unfolding market action like a hawk, and when there is little potential remaining in the trade, or the initial conditions that made you take the trade no longer hold, exit. So my stops are a long way away from the market and rarely get hit.
So in summary: have wide stops placed with due consideration for market action, never in arbitrary places. Don't overleverage. Watch the action unfold with a surgeon's care and take action to exit when appropriate.
magicdust
managing risk is a balancing act between estimates of expectation and advantage and ones capital position.
My thought is that stops as a "risk management" tool only have value if in fact they are not really "risk management" at all, but part of ones offensive strategy, ie, helping to create a positive expectation.
Under what conditions would this be possible? Is this possible? If one were able to find/forcast that some market had positive serial correlation, a random entry with a stop loss or trailing stop should work.
The problem is such market conditions are easiest to identify in hindsight. It "looks" like it would have worked because people focus on those unusual trends and read stories about fortunes made under such unusual trend conditions. Of course, This contradicts with the regular, day to day behavior of most trading markets, particularly stocks and stock indexes. So, the nieve trader starts off to make his fortune like the "big boys" end ends up moving from one losing trade to the next, wondering what is wrong.
Setting up and running this type of study is easy, and one can learn alot about ones market/trading assumptions.
The reality is no system of diversification or forecast is ever close enough to perfect for the aggressive/leveraged trader. Consequently, if on is trading with leverage, there are times when reducing, stoping out are neccissary as a last effort to preserve ones capital position, to attempt to liquidate before on is forced out of a position or similar. There will be other days and other opportunities, sometimes one must simply walk away.
these last effort risk controls, however, though, will tend to reduce return and forward expectation from the perspective of a trader with unlimmited capital. however, for the real life trader with constrains, it is reality, and a plan to deal with such situations such as some type of stop, can be better than being forced out.
My thought is that stops as a "risk management" tool only have value if in fact they are not really "risk management" at all, but part of ones offensive strategy, ie, helping to create a positive expectation.
Under what conditions would this be possible? Is this possible? If one were able to find/forcast that some market had positive serial correlation, a random entry with a stop loss or trailing stop should work.
The problem is such market conditions are easiest to identify in hindsight. It "looks" like it would have worked because people focus on those unusual trends and read stories about fortunes made under such unusual trend conditions. Of course, This contradicts with the regular, day to day behavior of most trading markets, particularly stocks and stock indexes. So, the nieve trader starts off to make his fortune like the "big boys" end ends up moving from one losing trade to the next, wondering what is wrong.
Setting up and running this type of study is easy, and one can learn alot about ones market/trading assumptions.
The reality is no system of diversification or forecast is ever close enough to perfect for the aggressive/leveraged trader. Consequently, if on is trading with leverage, there are times when reducing, stoping out are neccissary as a last effort to preserve ones capital position, to attempt to liquidate before on is forced out of a position or similar. There will be other days and other opportunities, sometimes one must simply walk away.
these last effort risk controls, however, though, will tend to reduce return and forward expectation from the perspective of a trader with unlimmited capital. however, for the real life trader with constrains, it is reality, and a plan to deal with such situations such as some type of stop, can be better than being forced out.
To be a good trader, all trading decisions should be based on signals and not noise. Furthermore, there are far more comprehensive ways to manage risk than by simple use of stops which can always be moved/canceled.
Jack Hershey has some interesting comments on stop losses - perhaps he can comment.
Jack Hershey has some interesting comments on stop losses - perhaps he can comment.
Interesting -- I can intuit this to mean that even with the use of a stop sometimes judgment from experience is used to close out a trade at above where the stop was set, and then the trailing stop cancelled?
Been fooling around with charts this week estimating entry and exit points assuming trailing stops set at certain % below entry.
Yesterday watched a trade that had I done it would have been successful long at .27 when it was stopped out from a downturn, but had I manually exited when it started trading in a range before a dip of about half the difference between the high and the stop, it would have been a potential winner at .40 instead of being stopped out at .27.
Mind you, this isn't even trading on paper, it's just me dicking around with a chart testing out a system I've been mulling over in my head.
Am I on the wrong track here? I'm not interested in the specific trade I outlined above -- I'm interested in the mindset and action of a trader.
That's right! Great post!