39 replies to this topic

[sagitarius_d]

I tested one system for futures several days ago, and it did better without any stops than with stops. But it is always wise to have them. 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.. However using stops is very very helpful when one is not watching the market tick-by-tick the whole day .. And also having firm stops lets you cut your lossess without hesitating should i stay in ,or should i sell.. I do not think though that one can sleep at all if that person does not put any stops ..The most important thing in trading is to stay in the game. Sometimes the stop will whipsaw you - sometimes it will save your skin..And since we are all emotional creatures, we would emphaseze on the "missed gain" rather than the loss that might have made us leave the game and try some other business..

[stockbucks_coffee]

there are 2 things... 1. find/develop a good trade system (back tested with up, down, and reversing trends) that you are comfortable with (either daytrade, short term, medium term or long term.) 2. use stops to manage losses or profits, when your trade system says to get in and to get out. so I use stops for 2 reasons only... when I'm ready to enter a transaction and when I'm ready to exit a transaction, because I have to have a reliable enough trade system that will get me out on minimum losses and get me out on maximum profits, most of the time. so doing the 2 things above should help one to be a better and successful trader.

[PIK.]

I believe in stops and their rigorous use, but as was previously mentioned by CGD, there are a plethora of technical reasons where to set the stop. Also, the stop must be set for the time-frame chosen and amount of capital allocated. One must also consider their own risk/reward ratio for the trade when setting stops and must not change their mind and ignore the original plan. I have seen some traders put in mental stops and then ignore them, not good, as it displays a lack of discipline for risk management and an unwillingness to accept that their decision was wrong. Not controlling losses will bankrupt ones account real quick. "Attention to profit is a sign of trading immaturity, while attention to loss is a sign of trading experience" - Alan Farley

[VermeerUK]

Hi darnelds, Just my basic thinking, Regarding 'stops'.......Being a 'position' trader,i think i would be at a disadvantage if i let Mrs Market have a look at my future intention/stratergy regarding my trades. i.e.....Card game analogy.....You wouldn't want to be dealt your first two/three cards face up,so as to give your playing opponents an edge over you,would you? So as a 'position' trader i only use 'mental-stops'. But for short-term/daytraders....I'd have thought 'stops' would be essential. Regards.V

[VermeerUK]

Sorry should add, I and most on here can watch the markets day in day out as we choose....This is my/our job full-time. But the vast,vast number of investors/part-time traders out there can't because they hold full-time jobs else-where. So imho,if you can't watch the markets day in day out then 'stops' are essential. Regards.V

[Chart Guru Doug]

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".

Yes, I do not enter a trade without knowing where I will get out.
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.
best

[HoseB]

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..

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.

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.

[HoseB]

OK, the story. In the early '80s when I was a newbie, I came across some promo about "NEVER had a losing trade". Well, I HAD to know about THIS! They don't give you much detail until you pay your money, so I signed up. I can't remember his name, but his play was to wait until the market/stock got oversold or overbought, then average into it 5 times with a stop wide enough that it had "never gone that far before". (a) I was amazed that this strategy had never failed, and ( thought one day it will and it'll be a disaster. (I said I 'experienced' this.... I didn't get caught because I didn't play in what followed shortly....) In '85 or '86, if I recall, the market got overbought and he started averaging into it in SP futures. The market extended enough to get all 5 positions short and he even had a WIDE stop... and of course, a broker's margin call beyond that if necessary. Long story short.... the market continued to extend (check the charts if you got 'em) until the broker's margin call stopped him out. There was such an uproar from the losers that the CFTC looked into it. Bottom line and to put it into money terms, "If the total accumulated over the last 20 years of zero losing trades = $100,000, the investors lost ALL of the $100,000 + a $75,000 MARGIN CALL") While I'm at it, another story.... A friend in Texas told me about an advisor guy who was managing money for the members of his church for free. How nice. Long story short.... After the top in March '00, he "bought the dip" in ProFunds leveraged Nasdaq fund.... Thinking it just HAD to bottom and turn up, he rode it all the way down to the point that not only did he lose effectively all of everybodys' money, he also lost his business, house, and Mercedes. (Stops, of course, would have prevented this... Heck, even I "bought the dip" a few times after the '00 top and lost some money myself. But stopping out saved my bacon to fight another day.) These two stories illustrate one of the market's most ironic brutalities..... "All you have to do to get knocked off is keep doing what has been successful in the past". 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.

[Sentient Being]

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'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.

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.

[TechSkeptic]

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?

SSB

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).

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.