Are stops really a good idea?

bmaber

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Have you ever noticed in Las Vegas that even on odds of 51% (blackjack) the house is making a killing? The reason is this; you trade your valuable and limited money, that you only have so much of, for worthless chips. The casino has lots of plastic chips, in fact an endless supply. As the game proceed both you and the house swing up and down, but at some point, if you play long enough, statistics say you will temporarily be down so low you can buy no more chips. You are bust, and you go home broke and the casino has ALL of your money. If you could have played on, statistically a new swing upward would be likely, but you must stop when you are broke. This changes the odds way in the house's favor.

I set up a simple simulation on a computer with a game 60% in my favor. It would randomly pick number 1 - 10, if it was 1-6 I win. If it was 7-10 the house wins. It turns out if I don't have enough money to start I will go bust before the enviable win that 60% odds will eventual give me.

In the book Trade Your Way to Financial Freedom this same experiment is listed as proof for money management. But if you think about it, a stop loss order is the same concept as trading too much of your account. With a stop loss you are tilting the odds in the house's favor. A stop can be though of as a mini "going bust" where you are forced out. A stop, in effect, is a forced sell low, after you bought high.

I ran a simulation on a simple breakout trading system. The data I used was from a very volatile and down trending market, but the system made money. Then I programmed in a stop loss. The tighter the stop, the more the system lost. It was not until I set the stop at 2.5 times the average daily price moment, that I got no hits on the stop, and the system became profitable again.

Are stops really a good idea? I would like to hear from experienced traders.
 
So if a black swan comes, your ****ed. And if you pick a bottom, your ****ed.

Not only would this method contain so much margin, you'd be lowering your "stakes" each time you pick a wrong place.

It could take weeks for the price to move back to where it was. Imagine buying cable at 2.00 and having to wait for it to reach there again.

The whole point in this "game" is to make sure you have enough to keep going and never run out.

Yes stops are a very good idea.
 
I like my close stops. If my stop gets taken out i can always re-enter the trade when price comes back to my original entry level (or even get in at a better price the second time around). This way you don't have to ride the trade when it is going against you an unknown amount (which could be huge).
 
its a very funny thing you...stops

at the end of they day, it depends on how you use them. you cant say they are good, or they are bad.
its where YOU place them and you who determines this.

over the yeard i have noticed though that had i not had that stop loss on, i would have eventually been up by huge amounts, as the market played out to where my intentions where.

However stop loss and leverage can be used in a clever way to win nearly always. e.g. (i will give a example with a spread bet firm, not direct access futures, as most guys here prob do Spread betting)

you have £100,000 in a SB account.
Dow is at 8,000. you beleive it will go to 9,000 over next few weeks/month (position trade)

you decide to use the leverage and stop loss in such a way that you are VERY likly to win, unless a Black Swan event happens .... (theyve happned quite a lot recently ent they lol)

so you decide to use 1% of capital for leverage (£1000) and lets say you are with CMC markets -

so as i remeber back in the days, with £1000 you can open a position of £10 per point.

NOW - where do you place the stop loss? Ill tell you - you place it at ZERO value of your account i.e. you get stopped out if the funds in your account go down to zero.

this would like this ;

you have £99,000 free equity left : £99,000 / £10 ppoint = 9,900

so you have room for 9,900 points to place a stop loss...crazy isnt it. so lets just say you place it at DOW = 0 (so you will lose £80,000 if it collapsed to zero)

lets sumarise :-

Open position = Long £10 ppoint @ 8,000
Stop loss @ 0
account funds = 100,000

over the next few weeks...the dow fuking drops to 7000...people are crying, but your down 10,000...but one day over the next month it goes up to 9,000

you close your position for +£10,000

account value = £110,000 +10%

this will be met with alot of sceptism. Simply because it screams in peoples faces. You can only do this if you are comfortable with losing that ENTIRE 100,000 - and thus can be guarenteed to win, ONLY if u have the right Leverage

think about it.....
i havent tried it...but i have alot of theories. and this one is good.
 
surely this is more dangerous with greater leverage, not better with leverage?

And who has £100k they don't mind losing? Or even £10k for that matter? Scary stuff..
 
It would probably work if you didn't mind waiting, and if you managed to find the extremes of the range. However if you pick a top or bottom, it could be a while until you even break even.
 
not me, and not you

but theyr are people out there willing to give money. i would know
 
I like my close stops. If my stop gets taken out i can always re-enter the trade when price comes back to my original entry level (or even get in at a better price the second time around). This way you don't have to ride the trade when it is going against you an unknown amount (which could be huge).

Thanks Tradergirl, think that reaffirmed what I have been thinking about my own stops recently, I have been using a 40 point stop (60 TP) on 15 min charts (DAX,FTSE), the 40 is for those odd times my entry candle has a long wick and taps my stop.

Been thinking of changing to 20 which would also help on the choppy days, alot nicer to realise I jumped into the chop with a 20 point slap then a 40 :)
 
The seduction of no stops is that it seems to work. You keep going deep, deep into the hole and then after hours/days/ weeks the price comes back to allow you to break-even or even make something of a profit. One day, however :devilish: it doesn't come back and you are wiped out.
 
Thanks Tradergirl, think that reaffirmed what I have been thinking about my own stops recently, I have been using a 40 point stop (60 TP) on 15 min charts (DAX,FTSE), the 40 is for those odd times my entry candle has a long wick and taps my stop.

Been thinking of changing to 20 which would also help on the choppy days, alot nicer to realise I jumped into the chop with a 20 point slap then a 40 :)


Yeah and if you get taken out at 20, price may well continue down to -40 or -60 or whatever. If you are still sure price is going to go in your direction you can buy in at that point-- even more profit for you and less taken out for stops :). Can also get stung multiple times if price is actually heading the opposite direction though, so use with caution!
 
The seduction of no stops is that it seems to work. You keep going deep, deep into the hole and then after hours/days/ weeks the price comes back to allow you to break-even or even make something of a profit. One day, however :devilish: it doesn't come back and you are wiped out.


No jon

Use my example. You will only get wiped out if the DOW traded to 0

That type of rading you can nearly always win. But as i said it screams in peoples faces for a number of reasons...one of them being not many of us want to hold that long, and accept its easy to be done. who wants to hold for weeks...months?..or how long...and it certainly cant be done at prop firms, b/c you cant do that type of trading.

....i only wish i had done it when i had the 100 large of investors money..... but greed..greed..greed...who the fuk want to hold like a muppet for what seems like eternaty? after all it will only come back one day. ? esp. if u have a stop at a place like i said.
 
Is the need to never be wrong a good idea?

Here's a chart of silver in CPI terms if you were long in 1980 without a stop.
silver-CPI.jpg
 
You could end up waiting several years for price to come back, or maybe even decades!!! Where is the good or profit in that?
 
So if a black swan comes, your ****ed. And if you pick a bottom, your ****ed.

Not only would this method contain so much margin, you'd be lowering your "stakes" each time you pick a wrong place.

It could take weeks for the price to move back to where it was. Imagine buying cable at 2.00 and having to wait for it to reach there again.

The whole point in this "game" is to make sure you have enough to keep going and never run out.

Yes stops are a very good idea.


Well Black Swans come in various sizes, one day the sun will explode, that's my idea of a big black swan. But in the markets there are limits to swans. Even if you bought Enron or Nortel at its peak, you had weeks to wise up that this was a better short than long, and probably could have made a bundle on the way down. That is a kind of stop. but it is not a tight stop. If you want to protect against 1 in 1000 type moves by all means put in a Black Swan stop at 2.5 times the daily swing, or Marty Schwartz used a 7% mental stop loss, but otherwise it looks like it is better to just let the market come around.
 
I like my close stops. If my stop gets taken out i can always re-enter the trade when price comes back to my original entry level (or even get in at a better price the second time around). This way you don't have to ride the trade when it is going against you an unknown amount (which could be huge).

That's not what happens to me on a tight stop. When I set a stop tight it is some magic number like 3.5 cents under yesterdays close price. Apparently a bunch of newbies like me are pick this same juice stop. Crowd statistics gets you. Then along comes the market maker, (a guy named 'chicky' on the floor of the exchange) or some 5 million dollar trading program at Goldman Sachs (using better market data than I have) and sees us flock of suckers. The top dogs gun our stops, picks up some cheep stock, and then the market turns on a dime and goes straight up.
 
hey.

firstly as for the silver CPI - that would only be taken up on INDEXES...and major ones for that

and UK trader girl..yeah you are right as i said none of us do it, b/c who want to hold like a muppet for god knows how long?

but nevertheless...it can be manipulated in a succesful way on the major indexes, beacuse they awlays have a nack for coming back.

you could do in week in, week out, month in month out on something like the DOW

but every decade or so...you will be ''fuked'' e.g. if you whent long the DOW last year at peack 14,000 ...you will have to sit on your ass and wait like a muppet for years now i would say

or

if you entered long on NASDAQ 100 in 2000 peak...you would till be sitting, and porbably so for another decade or 2

hoooweveer...it can be maniuplated in a clever way

The right time
The right leverage ratio to funds
the right stop loss (zero sum of funds)
and patience...
$$

and by the way, i dont do this, never have...and will probably only try it if i have made my millions in the future, and am very bored and want to see what i can do with my 10k or 100k and my theories.

ps. youd need at least £8,000 for this to work on lets say DOW for examples (8000 points x 1)
 
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