It comes down to this, plane and simple. If your stops are getting hit, you are trading the noisy areas. If you trade noisy areas, sure don't use a stop. But for us that do, we are expecting our trade to move in 1 direction, not chop around our entry for 5min, ultimately hitting our stop. If my trade is chopping around my entry, i know my system has failed, and usually get out before my stop will even be hit.
Trading with a Stop Loss in the Futures Market is for Losers
- Thread starter emg
- Start date
No, the system includes stops so being stopped out is part of it. Also, since you don't know where the market is going to stop moving against your trade position you got stopped out of, saying that I got my ass handed to me is unsound reasoning. Let's say I'm in an ES position at 1300 with a 10 point stop. I get stopped out on that trade for a 10 point loss and the ES is now at 1290. I then get another trade trigger in that direction, only it takes another 15 points of decline to get it, so I am entering at 1275. I enter and make and 10 point gain before exiting at 1285 because of price action, so now I'm at net 0 points for the two trades minus some commission costs. If I had stayed in that initial trade, I'd be down 15 points with absolutely no guarantee that the ES would make it back to 1300 within any reasonable timeframe. Why put myself through that kind of trade? I, and every trader, know with 100% certainty that I am going to have losing trades, so why try to fight the inevitable by pretending every trade will eventually come back and make a profit? It's just a form of wishful thinking.
So, you can't just assume that someone gets stopped out, then re-enters immediately or almost immediately and goes on to capture the initial move they were waiting for. In fact, if you just got stopped out, on what logical basis would you immediately re-enter the trade anyway? Price was clearly telling you you were on the wrong side of the market. Often the market will continue against that position before making the move you wanted and that continuation can be of significant size. I've been stopped out before "waterfall" drops of 15 ES points in a matter of a few minutes or hours, then gotten trade signals to go long again and made a profit, so the scenario I described is not just hypothetical.
Value investing is such a completely different animal that I'm not seeing the relevance to this discussion, frankly.
Nor am I saying that using stops will guarantee that a trader is successful, only that using them doesn't preclude success. Big difference. When I started out and was a losing trader, I used stops and I use them now, although differently, and I'm making money, so clearly that's not the important variable in the entire equation.
so basically youre using a stop as a way to exit. youre system is like this, it goes long, but if market drops 10 points, then long idea was bad and doesnt work. sure you can have this type of system. but what is your exit criteria then. if market overbought? then why exit at random 10 points loss. Then why you not you can target random 10 point profit if you have random 10 point exit.
i tell you i know a guy who tested his system with and without stop. the one without stop performed better. but he still trade his stop system. because of psychology. even though rationally you should trade without stop. what does this tell you? stops are for losers.
See, you assume the 10 points was a random price level. Wrong. It was just an example. One day it's 10 points. The next day it could be 5.25 points. The next day it could be 13.75 points. The next day it could be 8 points. It depends on what the market is doing.
Same for exits. It will depend on what the market is doing. Some trades end up being good for 1 point and some trades end up being good for 20 points. I take what the market gives. I'm just a bubble on the top of the market's ocean.
I'm not trying to tell the market what to do, I'm trying to listen to what its behavior tells me. There are times when it tells me to get out and times when it tells me to stay in. Again, I don't feel the need to be right on every trade nor do I have the patience to wait six months for a trade to finally become profitable, if I happen to enter on the wrong side of a trade just before a big run (and please don't be one of those Internet trading heroes who claim they never do that. Everyone who trades with any level of frequency does it). Are you trying to tell me that your friend's system was profitable on 100% of trades when he tested it without stops? If it wasn't, how did he make an exit decision and how is that any different from a stop?
Whether you use fixed stops or mental stops or when the pain is too much stops, you use stops.
Everyone uses stops except those fools that go down with the sinking ship.
FoN
Everyone uses stops except those fools that go down with the sinking ship.
FoN
I tend to agree with this view, rather than not. Stops can be used of course, but on an exceptional basis, more than a systematic manner. Especially if we talk about automated systems.
There are more effective ways to hedge, and i think i have been demonstrating this practically many times.
see for instance: http://www.elitetrader.com/vb/showthread.php?s=&threadid=222126
Tom
I guess when you are a paper-trading tiger, stops don't matter because it's all just "play money". If I had infinite capital and patience, I'd never use a stop either. Meanwhile, in the real world of limited capital and time, stops are useful.
As I said, a few people on this board do actually seem to know how to trade without stops. Unfortunately, none of them are posting on this thread.
"Hedges" are illogical. Why would you incur additional commission costs to protect yourself from just taking a loss on your original trade, which you may end up having to take anyway? You might as well set your money on fire.
Can one of you "no stops" people can name ONE well-known trader who actually follows your philosophy and is successful? No book I've ever read about successful traders ever mentioned this allegedly superior philosophy of trade management. Every successful trader I've read about had a point at which they just would admit they were wrong for now and get out of the market, even if they planned to get back in when the timing was better.
The problem with EMG is that he has some good points but doesn't refine them or always reach the right conclusion. He's at the state where he recognized something important, something that many beginners are unaware. But, instead of thinking about a range of scenarios, seems to think about a single scenario.
I agree that pure hedges are illogical. A useful hedge implies some asymmetrical trade off.
Stops are one method of risk control. They don't do a very good job but they can be an important method among an arsenal of methods that the successful trader employs. Logic man, I imagine many successful hedge funds do not use (hard) price based stops.
While, I have written much to the effect of how stops hurt performance (see my blog entries on this). Whether one uses a stop or not, there is still the implicit assumption of a certain distribution or nature to the market. The guy who uses a stop is explicitly stating he knows the distribution whereas the guy who doesn't use a stop is implicitly stating the market wont move beyond his account balance. So, he is also making a statement. In either case, the trader is making a statement about how far the market can move against his position.
I agree that pure hedges are illogical. A useful hedge implies some asymmetrical trade off.
Stops are one method of risk control. They don't do a very good job but they can be an important method among an arsenal of methods that the successful trader employs. Logic man, I imagine many successful hedge funds do not use (hard) price based stops.
While, I have written much to the effect of how stops hurt performance (see my blog entries on this). Whether one uses a stop or not, there is still the implicit assumption of a certain distribution or nature to the market. The guy who uses a stop is explicitly stating he knows the distribution whereas the guy who doesn't use a stop is implicitly stating the market wont move beyond his account balance. So, he is also making a statement. In either case, the trader is making a statement about how far the market can move against his position.