Learning about Stops
Posted 25 February 2004 - 11:09 PM
Posted 25 February 2004 - 11:45 PM
Posted 26 February 2004 - 05:24 AM
Posted 26 February 2004 - 06:22 AM
Posted 26 February 2004 - 06:35 AM
Posted 26 February 2004 - 06:48 AM
Yes, I do not enter a trade without knowing where I will get out.
I see your list as considerations before the trade. After that it's "making a play for [something] to go up (down), and risking 'X' amount on it".
That said, my stops for December and January were to not have stops, due to market conditions. I would have re-evaluated that decision had the market conditions changed ...
In the current market environment, the stops are like a credit card to me. I won't leave home without them...
I very seldom only use a $ amount for a stop, it is normally an objective exit.
Posted 26 February 2004 - 08:22 AM
1. Of course, Williams is right. During periods when your plays are "approximately right", looser stops will produce more profits. But when your plays are "approximately wrong", tighter stops will protect more capital. But in real-time, you don't KNOW which yours are, so whichever you choose is arbitrary. Maybe you choose well, maybe not so well.
Larry Williams has made some studies on stops in one of his books/ forgot which one/ ,where he shows that a wider stop can increase profitability,while a tight stop can actually decrease profitability to lossess..
2. A stop can be mental. Just because you don't place a hard stop on the trade does not mean you are trading without it. However, a mental stop is easier to override because you have to "do nothing" to let it extend your risk further. And though mutual fund traders can't "place" stops, selling at the end of the day when you are throwing in the towel on the trade is your stop.
We just saw a classic example of how one could have been trading without stops for years and "gotten away with it".... only to get killed in one swoop. That is, the March, '00, top in the Nasdaq. The drop was so severe that many tech players were effectiely wiped out. Even those still hanging in have recovered only a fraction of what they lost. They're still haning in, of course, and will lose the rest of it when the world wakes up to the "Al and George Deception Show". Hence my earlier comment, "... if you trade without stops, it's only a matter of time before the market wipes you out..." Might be a long time and you might have a sense of security (false one), but routinely using stops is the price you pay to make sure you don't get caught up in the one circumstance that blows out your portfolio.
PS I experienced a situation in the '80s where someone was famous for "Not having a losing trade in 20 years", then got wiped out in ONE event. It was written up in Futures Magazine. If a few members PM me, I'll post the story.
Posted 26 February 2004 - 09:37 AM
Posted 26 February 2004 - 10:03 AM
That's the other side of it right? I mean if you've read "Fooled by Randomness" the odds that someone like these people are out there and will trade in such a way that will eventually lead to disaster but they will just happen to retire and stop trading before the rare event or the inevitable event comes along that would have wiped them out.
It also illustrates what is an eventual CERTAINTY... "Trade without stops and you risk it all"... unless you're fortunate to quit before the circumstance catches up with you. We should all be so lucky.
That is, randomness tells us that there are people out there with seriously flawed systems that will survive a very long time, perhaps through an entire career. You get enough monkeys typing on the typewritter and eventually one produces something that make him look like a genius. But of course he can't reproduce it.
I signed up for a service about a year ago. That service was rated well by Timers Digest and appeared to be a good way to go. Last year the portfolio I followed was horribly crushed and apparently they used NO price based stop loss to tell them when it's time to abandon a losing position. Had I followed that portfolio through to this year I'd be down over 30%. I actually abandoned it fairly quickly after buying the service. But it did influence my thinking and do help me to do some damage in the first half of last year.
But there's a well thought of service with a good long record that totally blew up because they felt they didn't need stops based on price, that their system would not fail. Along comes the perfect storm and then it's disaster time. I believe they were fooled by randomness. Their success proved to them they did not need worry about the downside. The conditions favorable to their system moved on and they had no stop loss to save their subscribers when adverse conditions were in control.
~ Johann Wolfgang Von Goethe ~
Posted 26 February 2004 - 08:35 PM
This is a very interesting question, SSB. I have only done this a few times, and in most cases regretted it. When I placed a stop, it's usually there for a reason, i.e. at a technical level that showed weakness and/or a point at which I'm no longer willing to tolerate a loss. Now it's possible that such weakness can be a fakeout, but resumed strength afterward can also be a fakeout. You can get into a lot of second guessing that way. My preference is, when I've been stopped out, to find another trade. It also helps avoid the wash sale rule, which is a tax accounting pain (assuming you're trading in a taxable account).
Also, anyone have thoughts on when to get back into a position once you've been stopped out? If it comes back above your stop point do you re-enter?
The exception to this idea would be if you deliberately set a tight stop, with the advance intention to re-enter under certain conditions, if stopped out. In that case, you are simply trading your plan rather than reacting.
But personally, I usually set looser stops at levels where I feel the trade no longer makes sense. In this type of situation, I feel it's better to stand aside.