Stop Losses

[firewalker99]

But, yes, if the market does not do what's expected, I close out the trade. This is not a stop. This is an exit. A stop is determined ahead of time. I have no idea what the market is going to do after my entry ahead of time. Therefore, there is no therefore.

Perhaps this could all be cleared up by the simple use of some formal unambiguous definitions. If I understand correctly, you consider stops to be a way of closing out a trade by means that have been determined ahead of time. Exits are determined on the spot in real time, depending on market action (in your case price & volume). Some might argue that stops are just a part of an exit strategy, but if you know what you know what you are looking for before/U] you enter the trade. Yes, you don't think what could/should/would happen, but nevertheless you have scenario's at hand which you will apply depending on what hand the market shows you. One might say this is not predetermined because the price level where his stop/exit/target or whatever you want to call it, isn't fixed, but the price-volume pattern he is looking for is. Otherwise there would be no reason to enter nor exit a trade.

However, you've mentioned on several occasions you trade price from S to R and the other way around and you don't get out until you see a reversal signal. But having S/R as targets, is basically saying you dó have exits which are determined ahead of time. I take it you don't immediately close out your trade when price reaches the next S/R, but instead wait to see how price reacts to it (vigorously with a bounce, very low volume reaction, etc...). Nevertheless you are saying - in advance - that you will not exit your trade until price reached at a minimum those levels and you pretty much "don't care what happens along the way".

I can see how this is different from the trader who has determined in advance that he will for example (a) exit if price does not move in his direction in the first 5 minutes or (b) exit with a loss if price goes in the wrong direction by a certain amount of points, but it comes down to the same: you know what it is you are looking for and you will close out the trade when that happens.

It's like crossing the street: you know that - after you have looked left and right and left and right a second time - you will cross the street if there are no cars approaching. You have determined beforehand what action you will take, depending on what reality shows you. These decisions on what to do have been made long before, what the person who's crossing the road is doing, is merely acting on what he has always considered to be a valid signal, based on previous teachings, studies or experience. Likewise for a trader.

 

[dbphoenix]

I don't see how this is any different from . . .

Yes, you've made that clear. However, since I have only a vague idea what your understanding of price action is, I don't know where to begin to make my position any clearer to you. I've already started repeating myself, and that's not particularly productive. Perhaps someone else can be of more help.

 

[firewalker99]

Yes, you've made that clear. However, since I have only a vague idea what your understanding of price action is, I don't know where to begin to make my position any clearer to you. I've already started repeating myself, and that's not particularly productive. Perhaps someone else can be of more help.

Well you could illustrate what your actions would be if you were to encounter a situation similar to the one I described in post 158.

 

[new_trader]

Which kind of brings it back to the beginning. Why is it deemed so necessary for the aspirant to trade with cash in order to improve their understanding of price action? Especially given how blessed we are these days with equipment?

For very little outlay you can now have a fully functioning simulator, live charts and replay. For a little extra you can rig a PC up to TV/Monitor or projector and then sit back in an armchair and use a wireless keyboard or a remote control or allsorts. With speeded up replay it is perfectly feasible to watch a whole day or a year or whatever in a fraction of the time if you like. There are all sorts of non trading options that have the ability to enhance proficiency with reading price action. Trading with cash is only one of them.

Maybe you should go back and reread my posts.

 

[firewalker99]

Stops <-> exits?

If I understand correctly, most consider stops as a static thing and exits as a dynamic concept. Given the market is dynamic, dbphoenix' stand on the matter is not to use stops. However, I've seen post of people who don't use stops, arguing they will only close their position once in a profit. These people aren't using stops neither, but their reasoning is one of a whole different sort...

So am I right in defining stops as "fixed price levels that determine in advance where to get out" versus exits "price levels where one closes out his trade, with a profit or loss, depending the market action at that particular time". I don't know how far this matches anybody's view on stops, but as nobody else is giving much effort at composing a comprehensive definition, I might as well give it a shot myself.

 

[dbphoenix]

Well you could illustrate what your actions would be if you were to encounter a situation similar to the one I described in post 158.

Chart?

 

[darktone]

firewalker99.. this is for you man!

Lets say you have reason to go long near 70, you set a limit to buy at 80 inc costs. Your entry is superb! however your view at that point in time was wrong. if you had used the tightest hard stop youd be looking at -15! that is with a razor sharp entry!.

Ive included a linear regression to show mean visibly. Does this help to explain?

Let goooo luke!

 

[new_trader]

It's not a matter of which is the more important. It's a matter of deciding if the Stop is less important than the entry. Do you think it is?

[edit]

Split,

It's not a matter of deciding at all. As I have attempted to explain many times, a stop is in place to protect against a misjudgement with the entry. Without an entry, you don't need a protective STOP - simple. Don't you agree?

 

[firewalker99]

firewalker99.. this is for you man!

Lets say you have reason to go long near 70, you set a limit to buy at 80 inc costs. Your entry is superb! however your view at that point in time was wrong. if you had used the tightest hard stop youd be looking at -15! that is with a razor sharp entry!.

Ive included a linear regression to show mean visibly. Does this help to explain?

Let goooo luke!

Given the trend is cleary down, I wouldn't dare to enter long there unless a clear signal come up. Which wasn't the case the first time price went straight passed 12370 and lower.

But okay, let's assume for the sake of the argument I was long there, I would be out and my stop hit, if I indeed had my stops set so close. Where I would place a sensible stop would depend on my knowledge of the average volatility and some other factors. Anyway, my stop is hit and I'm out with a loss. When we look at the right end of the chart, we see price spiking back up, so perhaps it was a false break. Okay, I re-enter long.

What difference does it make whether I had (a) a hard stop at 15 points or (b) stopped myself out manually for 15 points? Both still leave the opportunity to go long once price proofs a re-entry is valid.

If you're saying the only reason you were stopped out is because of the hard stop, than I'd say you placed your stop at the wrong level. If I get stopped out of a trade, it is because I would stop myself out at that price level even if I did not have a hard stop in at the time. I fail to see the difference...

 

[darktone]

And i thought a picture told a story of a 1000 words!

I said lets say you had reason to be going long at 70 ie previous support. Indicators. Moons in alignment whatever! Prices tend to trend towards these levels right, and youve had your bounce off 70.

Im gona ask you some questions, please just answer one at at time. could be painfull, might be fruitfull.

1) 'If' you where planning to buy support where would place stop and why?

 

[Splitlink]

Split,

It's not a matter of deciding at all. As I have attempted to explain many times, a stop is in place to protect against a misjudgement with the entry. Without an entry, you don't need a protective STOP - simple. Don't you agree?

You make it sound so but no, I don't agree, at least, not in my case. I know what I'm going to do if the trade reverses on me better than how much profit I intend to take when I close in profit. That must mean that I have considered the possibility of a loss before I enter. I suspect that a lot of traders think the same way although, obviously, not all.

Good trading Split

 

[firewalker99]

Chart?

Took me some time to look something similar up, but here we are.

Ok, this is an example: DJIA e-minis.
Consider the following hypothetical example.

I am short from the first red dot. I have my stop at 13525. I scale out half of my position at 13475. I move my stop to say 5 ticks above the upper red line. I am still in, riding price down to below the lower red line. I am contemplating of exiting on the blue circled candle on high volume, but as volume takes off straight away (we are near the close) I decide to move my stop to say 5 ticks above the lower red line (around 13470). Price spikes up, without any apparant reason or cause to 13525 about 15 minutes before the close. I'm out at 13470 on the other half of my trade.

Suppose one didn't manage the trade and subsequently had no stops during this process. Basically, managing your trade is about trailing price and moving up your stop. Without stops, one would have saw price spike back up and pass his original entry point or thus making this a losing trade. Unless he didn't care about the spike at all, and left it open another 15 minutes (this is a 5-min chart) he'd still make a profit, but that's a bit like wishful thinking imo.

 

[firewalker99]

1) 'If' you where planning to buy support where would place stop and why?

That would depend on
(a) the instrument I'm trading
(b) the maximum adverse excursion of that instrument
(c) the tendency for that instrument to exhibit false breaks
(d) the timeframe I'm using to decide what is 'support'
(e) the current volatility

In short, my stop would be placed at a point where, if price broke through it, I'd know that support was breached to such an extent that a recovery back up was highly unprobably.

 

[dbphoenix]

Took me some time to look something similar up, but here we are.

Ok, this is an example: DJIA e-minis.
Consider the following hypothetical example.

I am short from the first red dot. I have my stop at 13525. I scale out half of my position at 13475. I move my stop to say 5 ticks above the upper red line. I am still in, riding price down to below the lower red line. I am contemplating of exiting on the blue circled candle on high volume, but as volume takes off straight away (we are near the close) I decide to move my stop to say 5 ticks above the lower red line (around 13470). Price spikes up, without any apparant reason or cause to 13525 about 15 minutes before the close. I'm out at 13470 on the other half of my trade.

Suppose one didn't manage the trade and subsequently had no stops during this process. Basically, managing your trade is about trailing price and moving up your stop. Without stops, one would have saw price spike back up and pass his original entry point or thus making this a losing trade. Unless he didn't care about the spike at all, and left it open another 15 minutes (this is a 5-min chart) he'd still make a profit, but that's a bit like wishful thinking imo.

So what is your question?

 

[firewalker99]

So what is your question?

My question is, how does not using stops improve your trading profits in this example? For the sake of the argument, let's assume for a second price finishes the day on the upper end of that spike.

 

[darktone]

In short, my stop would be placed at a point where, if price broke through it, I'd know that support was breached to such an extent that a recovery back up was highly unprobably

Theres no knowing! I also think your making something simple complicated!

2) Would you see the penetration of support as significant to your decision to enter long?

 

[firewalker99]

Theres no knowing! I also think your making something simple complicated!

2) Would you see the penetration of support as significant to your decision to enter long?

I'm sorry but I have to disagree. Let's say I studied 1000 similar examples and in 800 of those cases price continued lower after breaching support by whatever % I have in mind, that I can conclude with a high degree of certainty that the odds are in my favour for continuing further down. I know this because I have studied it. I know these are the odds, I didn't say I knew what was going to happen, I said I knew what the chances are of something going to happen. A subtle but very important distinction.

As for your second question, price can seemingly penetrate support to an untolerable level and still manage to recover and continue on it's merry way to the upside. Each decision I make when trading is based on an equal amount of evidence to substantiate the entry. There isn't one single element that holds so much significance that it could influence my whole decision-making process.

 

[dbphoenix]

My question is, how does not using stops improve your trading profits in this example? For the sake of the argument, let's assume for a second price finishes the day on the upper end of that spike.

Given that the entire trading plan appears to be solidly based on hope, I suggest that stops would most likely improve trading profits enormously.

 

[firewalker99]

Given that the entire trading plan appears to be solidly based on hope, I suggest that stops would most likely improve trading profits enormously.

Ok, let's take your chart then.

What would you do if this is what happens? Everything before and after the bars I added remains the same. The price bars spike outside of the normal maximum adverse excursion of the NQ.

 

[dbphoenix]

Ok, let's take your chart then.

What would you do if this is what happens? Everything before and after the bars I added remains the same. The price bars spike outside of the normal maximum adverse excursion of the NQ.

If you're suggesting that price was never rejected at 82 and the white bar never occurred nor did the following black bar, then I'd exit the trade. But what does any of this have to do with your lack of a trading plan?