trader_dante
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Hi Tom,
That's my understanding too - about the pro's I mean. But they have the funds to hedge their positions in other markets, thus enabling them to stay in trades long after diddly spit retail traders like me have blown their accounts.
Tim,
From what I've seen they don't really hedge.
Most of the guys I worked with just had a very good sense of the market so although they often averaged down and didn't use stops they wouldn't, for the most part, be doing it recklessly.
The amateur, as most of know the hard way, don't use stops because they are afraid of losing and they average again because they are hoping and praying the market will come back - again to avoid the pain of losing.
With the pros I sat with, the reason they didn't use stops was mainly due to two things. Firstly I think it was due to the fact that a spike caused perhaps by large size or lack of volume in some of the thinner markets like the FTSE could cause a "blip" of a few prices that they would consider unnatural and thus not want to be stopped out on.
Secondly because I think a lot of them used the order book to get a feel for where things are going. Charts allow us to use a pre-ordained stop because we can see where we are wrong but trading off the order book this is much harder. So I think they get in the market based on an idea (as we all do) with no initial stop and then average until that idea is wrong and then as soon as they know it is, they just get out.
Believe me I found it so weird how they did those two things (didn't use stops and averaged) because I was always taught to associate them with lack of discipline. However, these guys that did them were some of the most disciplined people I have ever known.
I knew guys that would sometimes make a mistake (e.g. do a few more lots than intended) and just instantly cut it for a loser. Like without even looking to see if the market might go their way. In similar circumstances I have to admit I would be inclined to see if it might go my way before I would cut it. They just took their losers and got out straight away.
It was a real eye opener.
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