Stops Vs. Drawdown
- Thread starter ProfitTakgFool
- Start date
Trader B does not employ any risk management, other than MENTAL monetary values. That is not risk management. Therefore, by default, Trader A is the better risk manager.
Back to the topic...
A stop will produce a REALIZED loss in context of the topic.
A drawdown is an UN-REALIZED loss which affects only monetary-based calculations used for account compliance. A drawdown, by itself, is not and does not provide risk management in any form. It is a number. "I was down $57,000, on the verge of being liquidated, but the market turned around and when I exited, I doubled my account!"
Osorico
You assume same drawdown but there is no basis for such assumption. If they are using the same system for entries, then trader B will most probably experience higher drawdown levels and possibly higher returns.
However, assuming for the moment same drawdown as you did, both traders have the exact same cumulative stop loss of $5k. They bot use some form of risk management. Trader A achieves this by establishing stops at well-defined levels. Trader B manages positions accordingly and goes flat at -$5k.
Trader A is jus a more conservative risk manager, Trader B is more aggressive and for that he may enjoy higher returns at the risk of larger losses than trader B.
My experience tell me to vote for trader A. Profitable trades are evident from start and 99% of the time money management will only add to frustration.
Ron
Great thread guys.
If the trading system has an indicator for the direction of the order flow, operating as Trader B is more profitable. On the other hand if the trading system is based on price action alone and does not reveal information about the current direction of the order flow, operating as Trader A is more logical. However there is one big caveat operating as Trader, i.e., it is easy to fall into an overtrading pattern particularly when the stops are too close and are tagged too frequently.
If the trading system has an indicator for the direction of the order flow, operating as Trader B is more profitable. On the other hand if the trading system is based on price action alone and does not reveal information about the current direction of the order flow, operating as Trader A is more logical. However there is one big caveat operating as Trader, i.e., it is easy to fall into an overtrading pattern particularly when the stops are too close and are tagged too frequently.
I agree with your post.
if you do not know how to swim, even with lifejacket, you will still be drowned, am I right?
for me, if I left the trading desk, I need the stop loss to take care of my opened trades in case unexpected things happen, otherwise, particularly in day trading, stop loss actually hurts you (you need figure out where to put, that will cost you time, you will act slower than other traders with no stop, the key to succeed in a volatile day trading envioroment is ACT FAST whether enter/exit/hold: fast fingers always win)
I know scalpers will not use stop, just as I told you, fast fingers is their strength.
for a trend rider, a hard stop makes sense
if you do not know how to swim, even with lifejacket, you will still be drowned, am I right?
for me, if I left the trading desk, I need the stop loss to take care of my opened trades in case unexpected things happen, otherwise, particularly in day trading, stop loss actually hurts you (you need figure out where to put, that will cost you time, you will act slower than other traders with no stop, the key to succeed in a volatile day trading envioroment is ACT FAST whether enter/exit/hold: fast fingers always win)
I know scalpers will not use stop, just as I told you, fast fingers is their strength.
for a trend rider, a hard stop makes sense
Neoxx, this probably is the third and my bad for the redundancy. This time around I was looking more for other traders views rather than sharing my method. I think it's important for all traders -- even successful ones -- to pick the brains of other traders because the learning process never ends, no matter how good you get.
The reason I started this thread was because on Wednesday I had a trade where I would have been much better off using a stop. It was a judgment call and the trade could have gone either way but I decided to average it in rather than stop and reload at a lower price. I figured we'd get one of those false moves below a quick bottom but it continued south. I eventually turned a profit on the trade but it was only 50% of my drawdown so I figured I'd just pick a few brains and get a few thoughts. Thanks to all for sharing.
The reason I started this thread was because on Wednesday I had a trade where I would have been much better off using a stop. It was a judgment call and the trade could have gone either way but I decided to average it in rather than stop and reload at a lower price. I figured we'd get one of those false moves below a quick bottom but it continued south. I eventually turned a profit on the trade but it was only 50% of my drawdown so I figured I'd just pick a few brains and get a few thoughts. Thanks to all for sharing.
Profit, I really don't see how having a stop can hurt a trader with a good system. Even if the stop is triggered, there is always time to get back in once the flow resumes in your original direction. Why should someone feel the pain of a huge draw down when a stop and reentry can easily solve the problem. After all, there is always a probability of being in the wrong side after taking a huge draw down. If one can resists overtrading, stop+reentry seem less painful.
all depends on what type of traders you are. in scalping, stop really hurts . in intra-day swing trading/trend following, stop makes sense, but unfortunately the market you trade may most time not trend. in overnight trading, stop is useless, the right tool is OPTION.