Stop Losses

Are stop losses any good?
In my early days I would follow the norm which I believed was 30 points I would see my position turn against me hit my stop loss and go my way, After begining to think it was a personal issue the market wanted my money (yes this 1.3 trillion market was conspiring against little old me)
I raised my stop loss to 50 points and the market still cheated me
Raised it to 100 points and now all the banks, hedge funds and private investors got in on the action took my 100 points and then went the way I originally expected

Now I never trade before an economic-news event.
Do not set a stop loss
If I set my entry/exit parameters right it might go down 200 points but it will come back up and let me come out at B/E or a small loss.
I know people will say it depends on how deep your pockets are.
Not very deep really
I aim to make 25 to 30 points a day times my stake, I treat trading as a job
As I am sure a lot of us do
Expecting Realistic returns on your capital, dedication lot of hard work
And taking few knocks should make you more than the average u.k salary

But would like to hear others views and experiences with stop losses.

It depends on what I am trading. For short term trades I don't set physical stops only mental ones and if the market goes against me to my mental stop then I hit a market order to exit the trade. On longer term trades then I would set one but at quite a distance from the current price.


Paul

gamma said:

Are stop losses any good?
In my early days I would follow the norm which I believed was 30 points I would see my position turn against me hit my stop loss and go my way, After begining to think it was a personal issue the market wanted my money (yes this 1.3 trillion market was conspiring against little old me)
I raised my stop loss to 50 points and the market still cheated me
Raised it to 100 points and now all the banks, hedge funds and private investors got in on the action took my 100 points and then went the way I originally expected

Now I never trade before an economic-news event.
Do not set a stop loss
If I set my entry/exit parameters right it might go down 200 points but it will come back up and let me come out at B/E or a small loss.
I know people will say it depends on how deep your pockets are.
Not very deep really
I aim to make 25 to 30 points a day times my stake, I treat trading as a job
As I am sure a lot of us do
Expecting Realistic returns on your capital, dedication lot of hard work
And taking few knocks should make you more than the average u.k salary

But would like to hear others views and experiences with stop losses.

Click to expand...

The principle I use is to set my stoploss at the point where I know that the trade has definitely failed. That doesn't stop me exiting before, if things are not looking good (jump out of the van before it goes over the cliff).

There are many ways to assess your stoploss point (endless discussion!) but affordability ain't one of them - if you can't afford your considered stoploss then don't take the trade.

I'm not aware of any "norm" for a stoploss in terms of points - it depends on your style of trading / risk aversion / profitability of your system and how clever you are at assessing what the market will do. The one thing I have learned from hard experience is to 1) calculate a stoploss 2) act upon it. Failure to do so will cost you dear but from what I've heard, many (including me) have had to learn it the hard way.

There are numerous threads / articles on setting stoplosses on here and on the net.

Good luck.

This is a very interesting question. As a day trader, you know you have arrived when you understand stops, and you will know it when you do. When you enter a trade it must be because you expect it to go in your direction. When it doesn't, why would you stay in the trade? I will tell you: because you think the price should do what you wanted it to do.

You must trade a pattern that gives you an edge and you should be out when the edge is not present. Depending on your time frame, this is usually going to be soon after you put the trade on if you are wrong. If you enter a trade and it goes against you by 100 pips and comes back and give you 30 pips profits, you are not trading an edge. The reason why you fiddle with the stop is because you don't really know what your edge is on entry.

Let's face it...

mental or hard, stop losses that are strictly enforced are the only guarantee you have that you will be able to participate in the earning opportunities that markets offer you another day.

Losses are nothing more than a cost of doing business as a trader.

The single most important reason most people are net losers is because they never learn to accept that losses are part and parcel of trading.

One of the most successful traders in New Market Wizards, Bill Lipshutz, was "right" in his trades no more than 20, 30% of the time, which did not stop him turning in one of the top net performances at his bank for years and years.

Let go of the individual trade as the absolutely meaningless event that it is, only focus on your long term edge, let go of wanting to be right, and concentrate instead on wanting to be as net profitable as you can.

iv had loads of probs with stops not settin them far enough or settin them too far n ,loosin loads of dosh when i didnt need to, i tend to trade short time frames and so i now see it like this:i set a max of 7/10 pips and if the price goes against me and stops me out,its because A i was wrong or B i timed it badly.simple.in my v limited experience having big stops is a waste of money,extending stops is worse.to my mind if you need big stops on shorter term trades you should worry about your entry timing more than the stop

0007 said:

The principle I use is to set my stoploss at the point where I know that the trade has definitely failed.

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This is the principle I generally follow with a slight adjustment. I put my stop at a point where it shouldn't go if it's to do what the pattern I saw suggested it would do.

The thing that really trips up a lot of traders is the idea the closer stops mean less risk. That's just not true. The closer you put your stop, the higher the risk of it getting hit and you taking the loss. Put your stop close enough and you pretty much guarantee that you end up losing money on the trade. Markets need room to express normal volatility, but a lot of newbie types get too caught up in the size of the loss they are willing to take and don't consider the odds of taking that loss.

Then too, there are some systems which are actually impaired by the use of stops.

FXSCALPER2 said:

This is a very interesting question. As a day trader, you know you have arrived when you understand stops, and you will know it when you do. When you enter a trade it must be because you expect it to go in your direction. When it doesn't, why would you stay in the trade? I will tell you: because you think the price should do what you wanted it to do.

You must trade a pattern that gives you an edge and you should be out when the edge is not present. Depending on your time frame, this is usually going to be soon after you put the trade on if you are wrong. If you enter a trade and it goes against you by 100 pips and comes back and give you 30 pips profits, you are not trading an edge. The reason why you fiddle with the stop is because you don't really know what your edge is on entry.

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Yes one does enter a trade expecting it to go in your direction there is always that one unaccounted issue that only becomes apparentent after the event.
And sometimes it’s something simple like early releases of economic data.
To illustrate I was in a long trade on gb/usd today as it met all my entry criteria,
I was expecting to come out of the trade before the BOE statement but got trapped had I had a 30-point stop loss I would have been blown out but my position came back and I closed at no loss

gamma said:

Yes one does enter a trade expecting it to go in your direction there is always that one unaccounted issue that only becomes apparentent after the event.
And sometimes it’s something simple like early releases of economic data.
To illustrate I was in a long trade on gb/usd today as it met all my entry criteria,
I was expecting to come out of the trade before the BOE statement but got trapped had I had a 30-point stop loss I would have been blown out but my position came back and I closed at no loss

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But how did you know it would come back to breakeven? It's easy to look at it in retrospect, and say "yeah, good thing I didn't set a stop, otherwise I'd have lost 30 pips", but what if things had've been different? What if the price had kept going against you - how far would you be willing to let it go?

From the sound of things, you need to learn the basics of money management - I don't see how you can judge position sizes without any idea of how much you stand to lose on a trade.

Some strats that i have devised on H1-H4 charts, have made very healthy profits over a decent period of time without an SL in place. Much better profits over the same period than if a set maximum SL was added.
However, what happens when you get that HUGE candle (that leads to a HUGE loss) before you get a SAR signal?? - YOU END UP WITH A HUGE LOSING TRADE!
So there is obviously risk involved in not using a stop. A level of risk/exposure that i would not feel comfortable with.

The shorter the TF, the more complicated it becomes obviously, to set, cancel, adjust etc. a physical stop. Thats why i would use a mental stop onshorter timeframes. Unless in the rare event, that i stayed in a trade over an important news release - then i would set a physical SL.

fifty2aces said:

But how did you know it would come back to breakeven? It's easy to look at it in retrospect, and say "yeah, good thing I didn't set a stop, otherwise I'd have lost 30 pips", but what if things had've been different? What if the price had kept going against you - how far would you be willing to let it go?

From the sound of things, you need to learn the basics of money management - I don't see how you can judge position sizes without any idea of how much you stand to lose on a trade.

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Well the point is and the one that only matters is that I did not lose.
Now money management I don't think I need to learn the basics I have a very good money management procedure that I have been following for 5years now and am quite successful in my trading.
What I am trying to debate here is
What stop losses people use?
The time period they use?
And how they determine what stop loss to use for what period?

this bit alarmed me!

If I set my entry/exit parameters right it might go down 200 points but it will come back up and let me come out at B/E or a small loss.

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Fair dos to a point but if you get caught at a trend change or worse fighting trend you could carried out on a stretcher!

From what youve said so far this might be better called "How can i find better entries?".
Theres no magic number that will work in a given tf or instrument, echoing whats already been said you should be looking for the door at the "seeing my position turn against me bit".
Ive recently changed from the tight hard stop thing. Now I set a disaster avoidance stop for the un4seen bigwig opening his gob etc. and monitor my position. From here Id expect to see prices heading in the intended direction, if they dont then I exit for as close to be as poss. Its working alarmingly well atm and cant really see me going back.

One thing i would say is I wouldnt recomend this strat for noobs or nailbiters!

Edit:- Forgot to say that i love to bring stops to BE asap, I love the im this position for free feeling! . I used to get upset being stopped be! At the time i should of being getting upset for trading AT! lol... Wot a wally!

Trader333 said:

It depends on what I am trading. For short term trades I don't set physical stops only mental ones and if the market goes against me to my mental stop then I hit a market order to exit the trade. On longer term trades then I would set one but at quite a distance from the current price.


Paul

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Bit confused here on the mental stop. Do you mean to attempt exit at a better price than possible with a hard stop?

With regard to stops, I'm not going to quote anybody's post because I don't want anyone to feel singled out.

But except for the catastrophe stop, used in the event of a power disruption or the loss of the connection to the broker or a sudden, temporarily incapacitating mini-stroke, stops are nothing more than training wheels, used by those who aren't yet confident in what they're doing. These individuals place the trade, set the stop, then sit back hopeful (or fearful, as the case may be) and hand over all responsibility for the trade to the stop. If and when they are stopped out, they state (or wail) that they were "stopped out", as though they themselves had nothing to do with the outcome of events.

Stops are essential to those who are not yet able to trade unemotionally, which, from what I read, is just about everybody. But those who can continue whatever assessment of conditions that they began before placing the trade throughout and after the entry will find little use for stops. If the trade is wrong, for whatever reason, they're out, and they continue their assessment of trading conditions without interruption, looking for the next opportunity.

"If I set my entry/exit parameters right it might go down 200 points but it will come back up and let me come out at B/E or a small loss."
"I aim to make 25 to 30 points a day times my stake,"
========================================================================================

The above suggests that you do not operate a risk/reward strategy, or if you do it is an unusual one.

"How can i find better entries?"
That is an very valid comment.
So if you have timed calculated your entry correctly would a tight stop loss not blow you out
there are basic rules like
trade with the general trend long/medium term
keep away from news etc

dbphoenix said:

If the trade is wrong, for whatever reason, they're out, and they continue their assessment of trading conditions without interruption, looking for the next opportunity.

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I totally agree.

That is exactly what my stop loss is there for.

I buy a breakout for the sake of argument.

Before I enter my trade I know where price is going to allow me to exit this trade as a loser, lets say somewhat beyond a previous swing low, or as a function of volatility / ATR, etc.

If I am taken out I am taken out and it's no big deal at all.

But I have been disciplined and taken a loss that is always roughly the same size percentage wise of my account, I always lose say 2% when I lose, whereas when I win on average it's always a multiple of that, because on average my winners are many multiples larger than my losers.

This way I can be "wrong" way beyond 50% of the time, and yet be very net profitable.

I think it is exactly this way of trading that totally discounts emotions, you just do not care about hit rate or the individual trade at all, all you care about is your long term edge and your net profits.

Hit rate most definitely is not in any way success relevant.

Show me a trader who is "right" anything way over 50% of the time, and who does not achieve that via stop losses that are larger than their take profits, meaning it's more of a feel-well strategy than anything else, but it most decidely is not about the bottom line.

Besides, systems that are right more often than they are wrong are decidedly less net profitable than their lower hit rate brethren:

Brett Steenbarger:

"...As a rule, maximizing batting average/minimizing drawdown comes at the cost of lowering overall system profitability...."

"William Eckhardt:

The Win/Loss Ratio
“One common adage on this subject that is completely wrongheaded is: You can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of a gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance. …

What really matters is the long-run distributions of outcomes from your trading techniques, systems, and procedures. But, psychologically, what seems of paramount importance is whether the positions that you have right now are going to work. Current positions seem to be crucial beyond any statistical justification. It’s quite tempting to bend your rules to make your current trades work, assuming that the favorability of your long-term statistics will take care of future profitability. Two of the cardinal sins of trading - giving losses too much rope and taking profits prematurely - are both attempts to make current positions more likely to succeed, to the severe detriment of long-term performance.”
Market Wizards

Finally, not to forget what are probably the two single most important factors one needs to fully understand in trading if one wants to make it, let alone make it big:

A: Mark Douglas excellent and very common-"sensical" observation that anything can happen anytime at all in markets overthrowing your clever analysis, all it takes is one big order going against you and triggering your stop loss.

B: Kenneth Grant, in "Trading Risk: Enhanced Profitability through Risk Control", depicts his experience as risk manager for some of the best and most successful hedge funds, amongst others Paul Tudor Jones funds and Steve Cohens SAC Capital, that:

ACROSS ALL TRADING STYLES, TIME FRAMES AND TRADERS, ONE RULE HOLDS TRUE:

10% OF ALL TRADES INEVITABLY ACCOUNT FOR 90% OF PROFITS !

Thing is, some wise guys might now assume that there is sthg they can do to improve that division of labour, through trading less, or working harder, or coming up with better analysis / systems whatever.

Problem is, doesn't work that way in real life.

In real life the law seems to be that it's pretty much always 20% of input that generates 80% of output, which is really all you need to concentrate on to achieve outstanding success, while in trading it's just a bit more extreme, 10% of input generates 90% of output.

dbphoenix said:

With regard to stops, I'm not going to quote anybody's post because I don't want anyone to feel singled out.

But except for the catastrophe stop, used in the event of a power disruption or the loss of the connection to the broker or a sudden, temporarily incapacitating mini-stroke, stops are nothing more than training wheels, used by those who aren't yet confident in what they're doing. These individuals place the trade, set the stop, then sit back hopeful (or fearful, as the case may be) and hand over all responsibility for the trade to the stop. If and when they are stopped out, they state (or wail) that they were "stopped out", as though they themselves had nothing to do with the outcome of events.

Stops are essential to those who are not yet able to trade unemotionally, which, from what I read, is just about everybody. But those who can continue whatever assessment of conditions that they began before placing the trade throughout and after the entry will find little use for stops. If the trade is wrong, for whatever reason, they're out, and they continue their assessment of trading conditions without interruption, looking for the next opportunity.

Click to expand...

:clap:

Especially when so much stop catching goes on - and how does a computer tell the difference between a large market order and a change in the situation? A good trader should have several stops in mind imo. The absolute stop can be automated, but not any of the others.

That is the other advantage of stops of course - they can react quicker than you.

I believe anyone who uses their money to trade instead of leaving it in a high deposit savings account is operating an unusual risk/reward strategy.
Or so the banks will have us believe.

gamma said:

I believe anyone who uses their money to trade instead of leaving it in a high deposit savings account is operating an unusual risk/reward strategy.

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If youre gonner tell me your using a demo account im gonna slam the door! lol!