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Learning about Stops


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#11 Maxwell

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Posted 25 February 2004 - 09:24 PM

I do not use stops period!

James,

Would you please elaborate on your reasoning? I can understand why mental stops may be preferable in certain situations, but isn't trading without stops somewhat risky??

#12 SideShowBob

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Posted 25 February 2004 - 09:46 PM

I thought trading without stops was called buy and hold investing... :blink: :blink:

#13 Sentient Being

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Posted 25 February 2004 - 09:49 PM

All stops are not "arbitrary". When building trading systems I include the stop loss as the exit signal. Which means its part of the optimization of the trading system. I also use a trailing volatility stop that can get tight or loose depending on volatility and it can also track down under the right conditions and often does. So my backtesting is very much related to stops and I use a system that helps to optimize the stop as I can use various degree of tightness for the trailing stop. It sometimes amazes you in backtesting how different degrees of "tightness" on a stop signficantly affect profit or loss on a stock traded. One thing that worries me is if subtle changes in a stop have a radical affect on the outcome. At that point I suspect the profitable stop may actually be overoptimized and not very useful going forward. I'm only an amateur but love the stops. Any issue I can slap a stop on saves me from making emotional exit decisions on the fly. It's a pain to keep adjusting them but on the winners it's always fun moving the stops up. Even when trading patterns I'll toss on on various trailing stops and eyeball them to see which one I want to use...then trail it along on the play. Now that is a more arbitrary use but so far it seems effective. It's just not worth my time building a system for a one time pattern play.
In the end we retain from our studies only that which we practically apply.

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#14 James Quillian

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Posted 25 February 2004 - 10:05 PM

if you don't use stops you don't trade futures, and/or what was put on as a "trade" becomes an "investment grade vehicle" suitable for long term holding
norton, not being sarcastic, just pointing out what personal experience has taught

You are right. I don't trade futures.

I have traded futures both using stops and not using stops. On balance, when trading futures, I have still come out better without them. Still, I wouldn't suggest anyone trade futures without stops unless they are very well financed.

I would not agree that what starts as a trade becomes investment grade just because a stop isn't used although I guess it could.

Stops fit into some peoples trading statagies and I don't have any vested interest in talking anyone out of using them.

Still, I think stops have become like a sacrament to technicians and I fail to see why their use needs to be automatic. Stops have always messed up my best trades to the extent that I am personally better off deciding to buy or sell moment by moment.

It always surprises me how experience can teach two different people exact opposite lessons. No sarcasim intended here either.

James Quillian

#15 HoseB

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Posted 25 February 2004 - 10:07 PM

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

Interesting question...

When this happens, you could be thinking... "the play was correct except the stop was too tight", but the trade could be in a sideways chop and stop you out a second time.

Suggest you not think of it as "back above my stop", but rather evaluate the situation with the updated data as though you had never taken the first trade. The situation "now" should stand on its own merit without regard to your getting stopped earlier.
40,000 headmen couldn't make me change my mind....

#16 Sentient Being

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Posted 25 February 2004 - 10:15 PM

It seems to me that even if you have optimized a stop loss against a stock is only has a certain probability of being right. So it also has the chance of being wrong. One thing I like to do is analyze the exit from the view of trend, support=resistance. For instance, if the stop loss says stop exactly up against a support line...I'll wait a day to see if support holds.
In the end we retain from our studies only that which we practically apply.

~ Johann Wolfgang Von Goethe ~

#17 Sentient Being

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Posted 25 February 2004 - 10:19 PM

By way of explanation, I only have the luxary of taking or not taking a stop signal in my company retirement accouts where I'm trading funds and can use no actual stop loss. In my stock trading via other accounts I use a hard stop at the broker...no decisions to make once the stop is breached.
In the end we retain from our studies only that which we practically apply.

~ Johann Wolfgang Von Goethe ~

#18 Chart Guru Doug

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Posted 25 February 2004 - 10:32 PM

Lots of things to consider when playing stops. Current market conditions Risk tolerance Size of the trade Support areas Ma's Patterns Volume Length of trend in directions of stop Nearterm t-lines Longterm t-lines Nearterm trade? Longterm trade? Fundamental play? Technical pick? Penny play? Large Cap? Volatility distance from base Sector performance Well, there is a bunch of things off of the top of my head. No wonder there is no black box technique for applying stops. :) best to all!
I am not your registered investment advisor. This is not a recomendation to buy or sell. This is my opinion and that is all. I may be long or short any security and change my position at any given moment in time. Do your own due diligence before investing any of your own financial assets.

#19 HoseB

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Posted 25 February 2004 - 10:58 PM

Lots of things to consider when playing stops.

Current market conditions
Risk tolerance
Size of the trade
Support areas
Ma's
Patterns
Volume
Length of trend in directions of stop
Nearterm t-lines
Longterm t-lines
Nearterm trade?
Longterm trade?
Fundamental play?
Technical pick?
Penny play?
Large Cap?
Volatility
distance from base
Sector performance

Well, there is a bunch of things off of the top of my head. No wonder there is no black box technique for applying stops. :)
best to all!

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".

I believe a trading method needs to be simple to have a chance of being executed decently well. That is why I trade on price + 1 range indicator.... and I don't think it matters which range indicator you use. Just pick one and have a sense of how it behaves in various markets.
40,000 headmen couldn't make me change my mind....

#20 sagitarius_d

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Posted 25 February 2004 - 11:00 PM

Well, Here is one application of stops /in a perfect world/. Suppose you have 100000 $ account.Let's also suppose that you are not willing to risk more than 1 % of your capital ot a single trade.So you have $ 1000 to lose on a deal. Suppose you do not like MO and want to short it . The obvious resistance point is 56.98..Now it is @ 56.58.So you can afford to lose 40 cents on each stock,which means that you can sell short 1000/0.4=2500 shares.. That is the maximum point for you to lose 1 % of your account. Well, in order to short 2500 shares you need to borrow around 41000 from your broker though :((.. And sometimes funny things happen- stocks gap overnight etc..But most of the time this should work fine :)..