The main function of the daily stop loss is to prevent a single day from hurting the overall monthly income. Say your average winning day is $200/day, but when you have a losing day you lose $600 or $700. Under these conditions, even if you win about 80% of trading days (16 out of 20 days a month) you are just barely breaking even.
Why Use a Daily Stop Loss? Do you use it?
- Thread starter Lloyd W. Coutee
- Start date
If that's what you're doing, you need to get it "the other way around". That is, "winning plays, $6-$700, losing plays $200". That way, you don't have to be correct even 50% of the time.
Stops shouldn't be base upon "time" (daily), but rather price. That is... you're willing to risk "only x" that your play is correct. Whether your stop is hit intraday or closes below by end of day is irrelevant.
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I learnt this the hard way. It was a psychological battle. It was not easy as it sounds because part of your brain tells you that "you are right, just hold on a little bit more as it happened before and you will be fine". It was hard to stop listening to that part of my brain. But you should.
And as @Scataphagos said, it's the other way around -at least my stop strategy-
One of the worst things that can happen to a trader's overall success.... "hang on and hope the trade reverses back in your direction, saving you from having to book a loss on this one". Unfortunately, sometimes (fairly often, actually) that happens! Therefore conditioning the trader to expect/hope for that next time + again and again.
However if you behave that way, it's only a matter of time before a BIG loser comes your way and "cleans your clock". Even worse is "averaging into a losing position". Sometimes even that works. But eventually it's a death knell. One small batch of bad decisions can wipe out 10 years of profits!
There are lots who advise... "Trade without stops. When you use them, you lock in losses... and if you just would have been more patient, the market would have come back and saved you from the loss". THAT'S STUPID! RIDICULOUS! Eventually, a "crasher" comes along with the potential to wipe you out. If you never exercised stop discipline... well, you're GONE!
There are 2 kinds of capital... "financial" and "psychological". Blow out either one, and you're likely finished! (Unless you're another Victor Niederhoffer... who always manages to resurrect himself with new capital regardless of how many times he wipes out.)
If you're going to lose your money, it should be like "being nibbled to death by ducks"... not like having a big chunk of your torso torn out by a Great White.
PRESERVE CAPITAL AT ALL TIMES. LIVE TO FIGHT ANOTHER DAY/TRADE!
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to take out hum emotions of course. have you heard of revenge trading?
My Trading Plan is rather lengthy cause of all Money Management rules I have in it, every single thing I can dream up to go wrong and every single thing that has gone wrong so far has the "answer" so I know what to do. So this is actually a very good post to start, many will not even think or read this post as they live in a dream world it will never happen to them. One of the areas traders never think about or want to think about are huge losing days, they certainly will happen if you allow it to happen. Unless it is a fat finger occurrence due to much slippage if you use stops, you do have controls of how much you can lose 99% of the time.
Your risk is biggest concerns when trading, if you don't use stops is cause you have strict mental and years of experience to be rigid on bailing, and if you use hard stops, don't move them unless to get to breakeven plus one tick. Often times when so many could have been profitable for the day, they lost one or two hundred bucks cause they get out at breakeven or got into hope mode and original stops were hit. Beginning traders often have the worst days as they lack being rigid, not having answers to questions that come up.
I go by this, my Goals each day per instrument is $2-300 per day when I cut back size or stop trading if not made by certain time. I risk approx. same on most trades and depends on time of day session and risk gets smaller tens minutes after the open, risk can be double of norm. Now if you are risking $100 to get $100 and you have extensive back testing and know what the mean losses are for the method, you need to keep working at the system till your losing trades don't exceed your daily goal is what it comes down to as my back testing show if I have three losing trades, trading gets worst. Just a matter of odd cycling of my method not working that day. By getting loses equal to amount you have for Goal, greatly reduces of stress. I have always said you need 75% winning days for day trading to be marginable profitable. And those who go for homerun profits, I have never heard of anyone doing close to 75% and their drawdowns are days and not just trades. Commissions are another segment few consider, but when retail adds it all up, it can be huge amount if you doing ten trades a day and five lots, $200 plus a day and why breakeven plus one is so important, that at least pays for all commissions most times.
If there is not way to shorten losing days, you have to find more ways to increase your daily goal to the "mean" of losing days.
The problem with stop-losses is that you need to accurately predict stop levels. Most of the time you will be exiting on a spike and the market will come back, so your -$700 day would've become a +$200 day. But accurately finding a stop that saves you money is as hard as finding a great entry.
"But accurately finding a stop that saves you money is as hard as finding a great entry."
I think it's harder to find a stop than great entry point.
I think it's harder to find a stop than great entry point.