Trading with a Stop Loss in the Futures Market is for Losers
- Thread starter emg
- Start date
Not sure what gave you the wrong impression, I use fixed stops.
FoN
My response came across wrong. I was agreeing with you but making the point that the posters who are allegedly trading without stops are the ones who are "paper-trading tigers", so they simply assume infinite capital and time into existence so they can be right, eventually, on every trade.
Trading with no stops on single trades does not mean absence of protection mechanisms.
More advanced approaches use multiple strategic layers. For instance, one can use 2 layers for the main scalping game and 2 additional (nested) strategic layers with an <b>higher frequency counter-scalping game</b> (which will provide a great form of hedging).
This would make an abyssal difference. While the single-trade stop approach is for sure a zero game profit (unless for experienced and smart discretionary traders), the right balance of strategic layers offers a much superior form of protection (clearly, in an automated trading context).
Tom
I think that there is also an implicit statement in the guy who is not using a stops decision to do so, and I've brought it up a couple of times and no one has responded, and that is an implicit statement about time. The trader not using a stop is assuming that the opportunity cost of capital being tied up in a trade will not exceed the amount of time the trade is held until it finally goes in the desired direction. There is also another, slightly more esoteric, implicit statement, which is that there will not, during the holding period, be another signal given in that same direction, which, had the trader closed out the original trade at a loss, could have been taken profitably. That's if your method gives you "embedded" signals within existing trades, which most non-discretionary systems will do and is where people will often "martingale", if they are into that approach. As I laid out in an example above, that second signal, assuming you'd taken your loss at your stop when your first signal turned out wrong, can be profitable, but not if you've held through a significant adverse excursion.
So, if I'm choosing between estimating maximum adverse excursion (i.e. how far should the market go against me, but no further) in the short-term (relatively speaking, since short-term could be a month) vs. depending on mean reversion and the market eventually going in my direction in who knows how long, I will choose the former every time, and it's precisely because I don't know the longer-term distribution of the market and I could be one of those unfortunate souls who shorted the bottom tick or went long the top, in which case the market's "fat tails" will wipe me out. The closer in time that you make your decisions, relative to your trading timeframe, the less likely you are to experience a "fat tail" adversely. THAT is key to staying in the game and that's why stops are useful.
While true, I think this is more about the use of a portfolio of strategies across timeframes than a single strategy. Not to try to limit the thread to one topic, but it's the single strategy approach which I was addressing.
I read a paper that showed the distribution of profitable short-term traders by the number of trades made per day. By far, the most likely to be profitable were the traders who made 1-5 trades per day (obviously, people who specialize in 1 or 2 setups and only trade those) and the traders who made 750+ per day (people more like you seem to be). I'm in the 1-5 trades per day camp. I'm a "one-trick pony" and don't mind that at all, so the idea of high-frequency counter-scalping without stops on the individual trades, isn't on my agenda.
jesse livermore used stops and bankrupted 4 times. if that doesnt that you the issue that stops hide the fact u use too much leverage then healthy then u dont know, stops are used to hide overleverage.. stops lead for many to ruin.
jesse livermore example shows you c;learly stops dont protect u from disaster.. he had disaster 4 times.
fatc is many people go into market and scared trading without stop. what does this tell you? how can you be scared trading a winning system.. maybe you have no system.. maybe you too much leevrage.
how come u not scared with stop and yes scared with no stop.
in the long run stops r bad for health.
if you think about it how do u know at the moment you create your stop, that if market goes down there is it bad for position?
lets say you put in trade at 10 oclock
stop 10 ES point hit at 11 o clock
but ur stop at 10oclock 10 points down
so ur stop you initiate at 10 o clock, predicting the 10-11 oclock price movement, if it goes 10 points down price movement is bad.
see the problem. you are predicting price action, not responding to price action.
so you say your system is reacting to price action, then how come you are trying to predict it. You are not folllowing your system.
"I'm not trying to tell the market what to do, I'm trying to listen to what its behavior tells me."
ok so u listen at 10 o clock to price movement of 10-11 oclock.. thats okay sounds reasonable..
but the logic is contradictory. because you say you listen to market behavior in the past, but ur stop is based on market behavior in the future. ur trading system seems to contradict itself.
Every trade I put on is based on a specific hypothesis about how the market will behave in the future based on the relevant past action (duh, freaking obviously, since that is all anyone can do unless they have a crystal ball), including a price beyond which it should not go. If it goes beyond that price, my REACTION is to exit because the trade has now disproven the hypothesis. Your idea that suddenly the market will reverse one tick beyond my stop and go in my original direction is NOT the norm, so using that as the basis for decision making is empirically invalid. Again, if you look at the probabilities and the actual distribution of prices, you'll see that the "one tick beyond a stop and then reverse" is highly unlikely and who knows for certain how far beyond the stop it will advance before reversing? No one knows, so why pretend that I do and expose myself to addition risk of adverse excursion? I'm not buying and holding here.
My system is so specific that even a deviation of one tick or one second of time can negate a signal. It's more like engineering than anything else. Just like an engineer wouldn't let someone build a bridge an extra inch beyond the specifications, I don't let trades move an extra tick beyond where the hypothesis says it should go because, within the limits of the hypothesis, I know the probabilities of what the outcomes are, while outside those limits I am exposed to the "fat tails" of the market. My risk has gone from strictly defined to undefined (or, if I held to zero, it's defined as the size of my initial position. Again, I've said earlier that zero is a valid stop, just not one I prefer to use). Why would one go from strictly defined risk to undefined risk? It makes no sense, especially since in order to transition from that defined risk to undefined risk, you've already experienced an adverse excursion, i.e. the market has already been telling you that you are wrong. Unless you have a highly-likely reason to believe that mean reversion will kick in and eventually put your trade into profitability, on what basis are you holding it?
Just give an honest answer to this question: If you had gone short in March 2009 after the bottom, would you still be holding that position? On what basis? That is the kind of "fat tail" you are exposed to without a stop.
If you can use the extreme example of a "one tick beyond your stop and reverse" to try to invalidate my perspective, surely I can use March 2009's bottom to invalidate yours.