Stops - do you want them?

[the1]

This is pretty much what I did one day back in my early years and I got my head handed to me. I set my OCO's at predefined limits and let them trigger according to my plan. I figured the market had to at least correct so I could trim down my loss but it didn't. It went higher and higher and ...you get the picture. For me, that was Black Thursday. The most important lesson the markets taught me. Unfortunately, I repeated that mistake a few more times before I learned the lesson.

Quote from outsource:

It`s not a suicide if you use OCO bracket and scale-in only when it`s triggered.

 

[the1]

The market is not 100% random, nor is it 100% efficient but it's darn close. As one poster posted a while back (can't remember who), "The markets are more random than traders think and less random than academia will have you believe." That just about nails it.

Quote from LEAPup:

The markets are not random, nor efficient.

 

[lurefo]

Quote from the1:

I figured the market had to at least correct so I could trim down my loss but it didn't. It went higher and higher and ...you get the picture. For me, that was Black Thursday. The most important lesson the markets taught me. Unfortunately, I repeated that mistake a few more times before I learned the lesson.

Quote from the1:

There are just times when you know it's going to be one of those, "close your eyes and buy" days.

RTM without a strict risk plan is like uncontrolled averaging down or martingale type strategies, it works until it doesn't. These traders see their account vanish in one day, sometimes on just one single trade. Your experiences show again how important it is to always have a stop loss or a disaster stop, a hedge... - whatever you call it - and stick to it.

Surprinsigly, the anti stop loss crew is very quiet.

Good trading all.

 

[LEAPup]

And the stop loss debate rages on...

 

[lurefo]

Quote from LEAPup:

The markets are not random, nor efficient.

Well, actually the market is random since it is a stochastic process.

Stochastic process
From Wikipedia,
In probability theory, a stochastic process, or sometimes random process, is the counterpart to a deterministic process (or deterministic system). Instead of dealing with only one possible reality of how the process might evolve under time (as is the case, for example, for solutions of an ordinary differential equation), in a stochastic or random process there is some indeterminacy in its future evolution described by probability distributions. This means that even if the initial condition (or starting point) is known, there are many possibilities the process might go to, but some paths may be more probable and others less so.


There has been some very interesting discussions previously on randomness with Maestro and a few others...

 

[pspr]

Quote from lurefo:

Well, actually the market is random since it is a stochastic process.

Stochastic process
From Wikipedia,
In probability theory, a stochastic process, or sometimes random process, is the counterpart to a deterministic process (or deterministic system). Instead of dealing with only one possible reality of how the process might evolve under time (as is the case, for example, for solutions of an ordinary differential equation), in a stochastic or random process there is some indeterminacy in its future evolution described by probability distributions. This means that even if the initial condition (or starting point) is known, there are many possibilities the process might go to, but some paths may be more probable and others less so.


There has been some very interesting discussions previously on randomness with Maestro and a few others...

That makes me smile.

 

[Metamorphosis]

Quote from lurefo:

Well, actually the market is random since it is a stochastic process.

Stochastic process
From Wikipedia,
In probability theory, a stochastic process, or sometimes random process, is the counterpart to a deterministic process (or deterministic system). Instead of dealing with only one possible reality of how the process might evolve under time (as is the case, for example, for solutions of an ordinary differential equation), in a stochastic or random process there is some indeterminacy in its future evolution described by probability distributions. This means that even if the initial condition (or starting point) is known, there are many possibilities the process might go to, but some paths may be more probable and others less so.


There has been some very interesting discussions previously on randomness with Maestro and a few others...

Ladies and gentlemen, a true breakthrough in modern finance... Put this one in the history books.

 

[lurefo]

Quote from Metamorphosis:

Ladies and gentlemen, a true breakthrough in modern finance... Put this one in the history books.

WTF said that was a breakthrough? I clearly stated that was an interesting subject and hinted to previous discussions....

So now let's hear what this genius has to say about either the thread's topic, ie Stop loss or that particular post regarding the randomness nature of the markets?

my guess is you're just another wannabe trader trolling the site

 

[d08]

Quote from jazzguysoca:

In my experience, hard stops have always degraded performance, but of course YMMV.
...

Exactly right. All my backtests on different systems (different instruments) have proven that even if stops help, including the slippage - stops do more harm than good.
Most people preach the "one size fits all" logic. Most of these people trade only one method so don't have insight into other methods. I've always used stops before on my positions but I stopped about a year ago because I didn't find justification for the whole "always use stops" preaching. As many others, I was 100% exposed long with stock positions during the flash crash, not using stops saved me about 5k. I've calculated the maximum loss per position I will likely experience (roughly 35% since I don't trade the really small names).

 

[lurefo]

Quote from d08:

All my backtests on different systems (different instruments) have proven that even if stops help, including the slippage - stops do more harm than good.

There are many ways to add a Stop Loss element to a strategy. Maybe that's one of the reasons you didn't get satisfying results in backtest. Personnaly I use more than one strategy, and I found that a dynamic - as opposed to a static - stop loss approach does a very good job.

Quote from d08:


I was 100% exposed long with stock positions during the flash crash, not using stops saved me about 5k.

No offense, but I don't see how that argument can be used to continue not using stops. Just because the market bounced back up favoring your "no stop" scenario doesn't mean it will do it as well next time( or at least not so quickly).

IMO, you fall in either the first or second category of the traders who use no stop that I listed in an previous post - correct me if I'm wrong....

Good trading!

Ok I see the folks that advocate not using stops are mostly saying they're using size management, bigger margins, basically less leverage. Here is why I think this is inferior (B1S2 that one is for you) to trading with stops :

1) Some of the guys that use little leverage or no leverage at all and have survived the flash crash on the long side seem to use that as an argument to justify having no stop. Well if studying the history of the markets has taught us one thing it is definitely that basing one's risk strategy on past price movements/volatility is a mistake. Strangely, the markets like to suprise us with price movements, jumps in volatility and behaviors that were never experienced before. So ... next time the S&P goes limit down and re-opens at 500. Little leverage guy with no stop with 1ES car per every 25K survived the 100 pts flash crash drop thinking the worse is over. Well this time, different story: our man is wiped out.

2) If a 25, 50% or more drop in the market against your position doesn't scare you then in my opinion you are way underleveraged, or you're facing volume constraints in a thin market... If we ignore the later option, that's not trading at its best, that's more investing. Wich is fine btw, I'm not saying that one is better than the other, but that is just not good trading to me. As traders I think we must maximize returns by making good use of the available leverage within the limits of our strategy's drawdowns and you can't sanely use aggressive leverage if you have no stop. In that sense, that seems inferior to me.

3) There are different ways to skin the cat but for many traders, trades are invalidated once a condition is met (price area is touched/broken or a certain indicator crosses XYZ, etc). The logic wants to get out or as others suggest to hedge (options, other instrument, etc...). In any case it seems to me that having no stop does not fit at all with this type of trading.