# Stop Loss is not always your friend...



## princeplanet

This happened to me twice in one week last month, both times the day before the stocks (CCV and RIO) went ex div, essentially the SP spikes 8% down and then up again, enough to trigger my stop order orders. Obviously I don't buy back in as I'd be down 8%. Missing the dividend was bad enough, and in the case of CCV watching it climb a fair bit in the last fortnight is just salt in the wound!

Being a newb, what did I do wrong here? I thought I was being "safe", but still managed to get royally rogered. How do I avoid this happening again? Please don't say avoid stop losses altogether, they have worked for me as well as against (infact RIO has gone way down since then, so don't feel so bad about it now...). 

Any strategies for minimising these kinds of risks?


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## CanOz

*Re: Stop Loss is not always your friend....*



princeplanet said:


> This happened to me twice in one week last month, both times the day before the stocks (CCV and RIO) went ex div, essentially the SP spikes 8% down and then up again, enough to trigger my stop order orders. Obviously I don't buy back in as I'd be down 8%. Missing the dividend was bad enough, and in the case of CCV watching it climb a fair bit in the last fortnight is just salt in the wound!
> 
> Being a newb, what did I do wrong here? I thought I was being "safe", but still managed to get royally rogered. How do I avoid this happening again? Please don't say avoid stop losses altogether, they have worked for me as well as against (infact RIO has gone way down since then, so don't feel so bad about it now...).
> 
> Any strategies for minimising these kinds of risks?




If you want the divi then why not allow for a little extra volitility in your stop placement. 

Otherwise stay out of the market until the stock goes Ex.

CanOz


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## pixel

*Re: Stop Loss is not always your friend....*



princeplanet said:


> This happened to me twice in one week last month, both times the day before the stocks (CCV and RIO) went ex div, essentially the SP spikes 8% down and then up again, enough to trigger my stop order orders. Obviously I don't buy back in as I'd be down 8%. Missing the dividend was bad enough, and in the case of CCV watching it climb a fair bit in the last fortnight is just salt in the wound!
> 
> Being a newb, what did I do wrong here? I thought I was being "safe", but still managed to get royally rogered. How do I avoid this happening again? Please don't say avoid stop losses altogether, they have worked for me as well as against (infact RIO has gone way down since then, so don't feel so bad about it now...).
> 
> Any strategies for minimising these kinds of risks?




RIO went ex-div on the 6th, CCV on the 8th.
Both dividends came out at less than 2%, well below the relative volatility. IMHO, that makes dividend stripping not the most effective way to trade those two stocks. In CCV's case, you would have held against an 8c drop, hoping for a 2c gain the next day. OK, so you could say you were happy to hold because CCV was in an uptrend and recovered quickly. But if that was your conviction of the stock, you could just as easily have widened the stop-loss margin. 
Would I recommend fiddling with the rules? Hell, no! Especially if you're a noob, you trade your Plan and accept that some individual trades turn out less than optimal, but on overall balance, your system has a positive return. In the chart below, the arrows indicate buy and sell levels. Quite obviously, the 7th was the day to sell, as close to $1.30 as possible. Had you then bought the next arrow on the 15th, again close to $1.30, you'd be in good profit by now, several times the measly 2c dividend.


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## tech/a

*Re: Stop Loss is not always your friend....*



> Obviously I don't buy back in as I'd be down 8%.




If your stop took you out at the very bottom yes.
But your down 8% then whether your on the side crying or back in it after 
you've noticed the why.
Its happened to me before ---- being a techie I've been stupid enough
not to check simple things.
But I would be straight back in if it was still technically a hold--spike or not.


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## princeplanet

*Re: Stop Loss is not always your friend....*



CanOz said:


> If you want the divi then why not allow for a little extra volitility in your stop placement.
> 
> Otherwise stay out of the market until the stock goes Ex.
> 
> CanOz




Yeah, from now on, a few days before going ex I cancel the stop, seeing it's gonna be purged by Comsec on the ex div day anyway. This way I can't get bitten by any nasty spikes down. BTW, the spike down for CCV was the director selling a bunch of shares. Effectively it 'bounced' me out of the divvy, me and a stack of others I imagine. Is this a kind of illegal manipulation?


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## princeplanet

*Re: Stop Loss is not always your friend....*



pixel said:


> RIO went ex-div on the 6th, CCV on the 8th.
> Both dividends came out at less than 2%, well below the relative volatility. IMHO, that makes dividend stripping not the most effective way to trade those two stocks. In CCV's case, you would have held against an 8c drop, hoping for a 2c gain the next day. OK, so you could say you were happy to hold because CCV was in an uptrend and recovered quickly. But if that was your conviction of the stock, you could just as easily have widened the stop-loss margin.
> Would I recommend fiddling with the rules? Hell, no! Especially if you're a noob, you trade your Plan and accept that some individual trades turn out less than optimal, but on overall balance, your system has a positive return. In the chart below, the arrows indicate buy and sell levels. Quite obviously, the 7th was the day to sell, as close to $1.30 as possible. Had you then bought the next arrow on the 15th, again close to $1.30, you'd be in good profit by now, several times the measly 2c dividend.
> 
> View attachment 51604





Yeah, I did sense CCV was on an uptrend, but had zero confidence in my inkling....  After I was bounced out, I just felt dirty, like I'd been financially raped!  I needed time to think about what had happened and by 4 oclock, it was too late to save the div. You're right though, screw the div in that instance, I should have kept my eye on the bigger prize. Maybe getting stung is the best way to learn a lesson......


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## CanOz

*Re: Stop Loss is not always your friend....*



princeplanet said:


> Is this a kind of illegal manipulation?




I don't know, if its an obvious place for stops some big knob might gun for them for a quick scalp...yeah why not? Its not manipulation, just part of the game really....

CanOz


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## ROE

*Re: Stop Loss is not always your friend....*



princeplanet said:


> Yeah, from now on, a few days before going ex I cancel the stop, seeing it's gonna be purged by Comsec on the ex div day anyway. This way I can't get bitten by any nasty spikes down. BTW, the spike down for CCV was the director selling a bunch of shares. Effectively it 'bounced' me out of the divvy, me and a stack of others I imagine. Is this a kind of illegal manipulation?




called market and system risk, expect manipulation, pump and dump, short sell in for the kill, some one or something  doesn't like your stocks  and XXX factors ...

when you in the market EXPECT and ACCEPT these things happen, whether it happen or not and price accordingly
you be a much better investor if you accept and expect those thing to happen


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## ROE

*Re: Stop Loss is not always your friend....*



princeplanet said:


> This happened to me twice in one week last month, both times the day before the stocks (CCV and RIO) went ex div, essentially the SP spikes 8% down and then up again, enough to trigger my stop order orders. Obviously I don't buy back in as I'd be down 8%. Missing the dividend was bad enough, and in the case of CCV watching it climb a fair bit in the last fortnight is just salt in the wound!
> 
> Being a newb, what did I do wrong here? I thought I was being "safe", but still managed to get royally rogered. How do I avoid this happening again? Please don't say avoid stop losses altogether, they have worked for me as well as against (infact RIO has gone way down since then, so don't feel so bad about it now...).
> 
> Any strategies for minimising these kinds of risks?




Everything works until it stop working  only you can answer what you prepare to do 
no system is perfect, you lose some you win some make sure your win ratio is higher than your loss ratio.


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## chops_a_must

*Re: Stop Loss is not always your friend....*



CanOz said:


> I don't know, if its an obvious place for stops some big knob might gun for them for a quick scalp...yeah why not?




Haha.

Not to mention buying in the stack.


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## Garpal Gumnut

*Re: Stop Loss is not always your friend....*



chops_a_must said:


> Haha.
> 
> Not to mention buying in the stack.




lol

I generally try and execute my stop losses at 12.26 Sydney time.

Usually the North Shore snorters have a nose full of powder on board by late morning and are getting hungry for lunch, feel powerful and buy anything, and my stop loss is executed manually at my stop loss price.

Automatic stop losses are executed when they are operating at Year 10 level, at 10.10.

I prefer Grade 4.

Watch for daylight saving etc. 

gg


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## princeplanet

*Re: Stop Loss is not always your friend....*



Garpal Gumnut said:


> lol
> 
> I generally try and execute my stop losses at 12.26 Sydney time.
> 
> Usually the North Shore snorters have a nose full of powder on board by late morning and are getting hungry for lunch, feel powerful and buy anything, and my stop loss is executed manually at my stop loss price.
> 
> Automatic stop losses are executed when they are operating at Year 10 level, at 10.10.
> 
> I prefer Grade 4.
> 
> Watch for daylight saving etc.
> 
> gg




You taking the piss? In the Beginner's Lounge??  Nice....


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## skc

*Re: Stop Loss is not always your friend....*



princeplanet said:


> This happened to me twice in one week last month, both times the day before the stocks (CCV and RIO) went ex div, essentially the SP spikes 8% down and then up again, enough to trigger my stop order orders. Obviously I don't buy back in as I'd be down 8%. Missing the dividend was bad enough, and in the case of CCV watching it climb a fair bit in the last fortnight is just salt in the wound!
> 
> Being a newb, what did I do wrong here? I thought I was being "safe", but still managed to get royally rogered. How do I avoid this happening again? Please don't say avoid stop losses altogether, they have worked for me as well as against (infact RIO has gone way down since then, so don't feel so bad about it now...).
> 
> Any strategies for minimising these kinds of risks?




The point of the stop loss is exactly that - stops you from further loss. With placing stops you need to consider many things. Your risk, your intended holding period, the volatility of the stock as well as the liquidity of the stock.

I don't know what exactly happened with CCV but it appears that the seller hit a soft spot in liquidity so the price crashed through before quickly recovering. So... with a low liquidity stock (like one with a thin market depth), you need a wider stop.

And sometimes you just accept there's bad luck and you move on. When you trade enough you will eventually learn to have no emotion what so ever when a stop is triggered. 

And don't blame every bad trade on manipulation. The director needed to sell and executed poorly. He sold his shares cheaper than he otherwise could so he's lost more than anyone else. Those idiots on HC have been saying Lynas is manipulated from $2 down to 50c...


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## Boggo

*Re: Stop Loss is not always your friend....*



skc said:


> The point of the stop loss is exactly that - stops you from further loss. With placing stops you need to consider many things. Your risk, your intended holding period, the volatility of the stock as well as the liquidity of the stock.




Exactly, I wonder how many are still holding BBG who now wish they had a stop loss in place.


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## tech/a

*Re: Stop Loss is not always your friend....*

Found this thread
Seems to be appropriate

R/T
I question whether you can paint the issue with a broad brush
What about capital base and risk of ruin as pointed out particularly in a leveraged instrument.
I'm sure Barclays would have liked a stop loss on their currency floor.

The question of opportunity cost where you flounder under your buy price and bottom draw your trade.

I'm sure overtime this question/statement will have a number case studies and supportive documentation.

I personally find using a Breakeven stop helps my mental attitude towards as trade--- particularly when I can't stand more than an hrs screen time. My own testing has shown the addition of stops to be beneficial.

I'd like to investigate portfolio stops and index stops/time stops more even comparing the constituents of a portfolio to it's composite chart to increase performance.

Trailing stops are another issue again
Along with timeframe.
Both trading and holding timeframes
Don't know all the answers but hope to be a lot closer throughout this year.

It's not a priority but definately a question I'd liked answered for a number of reasons
The obvious is v profit.


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## DeepState

*Re: Stop Loss is not always your friend....*



tech/a said:


> Found this thread
> Seems to be appropriate
> 
> R/T
> I question whether you can paint the issue with a broad brush
> What about capital base and risk of ruin as pointed out particularly in a leveraged instrument.
> I'm sure Barclays would have liked a stop loss on their currency floor.
> 
> The question of opportunity cost where you flounder under your buy price and bottom draw your trade.
> 
> I'm sure overtime this question/statement will have a number case studies and supportive documentation.
> 
> I personally find using a Breakeven stop helps my mental attitude towards as trade--- particularly when I can't stand more than an hrs screen time. My own testing has shown the addition of stops to be beneficial.
> 
> I'd like to investigate portfolio stops and index stops/time stops more even comparing the constituents of a portfolio to it's composite chart to increase performance.
> 
> Trailing stops are another issue again
> Along with timeframe.
> Both trading and holding timeframes
> Don't know all the answers but hope to be a lot closer throughout this year.
> 
> It's not a priority but definately a question I'd liked answered for a number of reasons
> The obvious is v profit.




Oh Sh!take mushrooms.  I can feel a world of pain coming my way.....  

I'll engage as part of a Coalition of the Actually Willing.  I'm going to need to hear from at least one person in each of:

behavioural finance; and
options / quantitative finance who can do and verify stochastic modeling and speak Greek.

Surely they are out there.  Whether they are prepared to suit up is another thing.

If Sinner would come out of retirement, that would be good. I'd share a foxhole with that guy.

This discussion tends to devolve into something like religious belief where the evidence suggests that matters that are untestable will just consume 99% of the energy.  I have zero interest in that.  One of the rules of engagement here is that any debate that might develop requires tangible evidence for assertions to stand...not just leaps of hand wave type 'logic' (I've been involved in too much of that utter nonsense from illogical self appointed logicians).

Even still, this is a non-binding commitment subject to further due diligence and a cooling off period.  It's got regret written all over it.


Tech/A, the above is not any disrespect to you or your abilities.  I've never interchanged materially with you.


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## burglar

*Re: Stop Loss is not always your friend....*



tech/a said:


> This is how you get off.
> All you have to do is use it.




My preferred default.


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## tech/a

*Re: Stop Loss is not always your friend....*

Fair enough.


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## DeepState

*Re: Stop Loss is not always your friend....*



tech/a said:


> Found this thread
> Seems to be appropriate
> 
> R/T
> I question whether you can paint the issue with a broad brush
> What about capital base and risk of ruin as pointed out particularly in a leveraged instrument.
> I'm sure Barclays would have liked a stop loss on their currency floor.
> 
> The question of opportunity cost where you flounder under your buy price and bottom draw your trade.
> 
> I'm sure overtime this question/statement will have a number case studies and supportive documentation.
> 
> I personally find using a Breakeven stop helps my mental attitude towards as trade--- particularly when I can't stand more than an hrs screen time. My own testing has shown the addition of stops to be beneficial.
> 
> I'd like to investigate portfolio stops and index stops/time stops more even comparing the constituents of a portfolio to it's composite chart to increase performance.
> 
> Trailing stops are another issue again
> Along with timeframe.
> Both trading and holding timeframes
> Don't know all the answers but hope to be a lot closer throughout this year.
> 
> It's not a priority but definately a question I'd liked answered for a number of reasons
> The obvious is v profit.




Hi

Let's try this.

I think a lot of the issues on this discussion boil down to two things.  If we can find common understanding on these points, I think we'll have a good chat.

Point 1: What makes money?  What is risk management?
Point 2: Single outcomes are just one sliver of a probability distribution and says nothing about it other than the fact that it was possible.

Point 1 is important for definitional purposes.  We can deal with Point 2 later. 

I will state what I take 'signal' to mean and what 'risk management' means.  If your view differs, that's fine, but we need to make sure we understand what each other is saying and what our conceptual framework looks like.

A 'signal' is the attempt to discern market movement.  It is a directional prediction on something. The signal has power if it actually predicts accurately to some degree.  It can be worthless if it has no predictive value at all.  Worse, behavioural biases can lead signal value for investors to be negative.  A signal can be anything that purports to be a prediction.  It can be the length of skirts to a 50 page valuation or 1 million lines of code in a neural net algo, to a 20% Flipper.  It doesn't matter what generates a prediction for these purposes.  A signal is a predictor.  If you give up, your predictor goes to zero.

'Risk Management' is any activity which determines position sizing.  Risk management does not make money.  It does not have alpha.  If your signal is static electricity, no amount of risk management will improve your expected return.  It can change the shape of your probability distribution, but it cannot change the expected return.  In other words, with no ability to know where the markets are going at all, you have no expected return.  Just whacking a 5% stop on it doesn't add any value whatsoever in terms of expected outcome.  It just changes the pathway.  Setting stops, trailing stops etc. just changes the pathway, but not the expected trajectory of the pathway.  I call this bending/reshaping the distribution.  You can change position sizes, implement different ones in rotation each Thursday...same deal.  No change in expected outcome.

Right at this time, I am only talking about what makes return and position sizing as two different concepts that are involved in the process of trading/speculation.  Let's not step into psychological matters quite yet.

Over to you.


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## tech/a

*Re: Stop Loss is not always your friend....*

My opinion?
I'm a builder not a financial whiz.

I have a number of areas I work
With for my long term financial 
Security.

So is this a general or specific chat.
With regard point one.

Specific as in Trading only.


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## DeepState

*Re: Stop Loss is not always your friend....*



tech/a said:


> My opinion?
> I'm a builder not a financial whiz.
> 
> I have a number of areas I work
> With for my long term financial
> Security.
> 
> So is this a general or specific chat.
> With regard point one.
> 
> Specific as in Trading only.




Trading only.


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## avion

*Re: Stop Loss is not always your friend....*

Yeah, i often read about protecting the downside and often focus so much on it that i forget to keep an eye on the upside. I have practically given up on trailing the stop since so often the move has another 2/3 to go but i got stopped out on the first 1/3. Likewise with B/E stops, great mental relief but get stopped too often to what was a great move. It's a killer to find a balance but these days just stick to original stop and even that can be pain in the a*s sometimes. So many times if the stop was just a tick or two wider i would not be stopped out but that's a whole new lot of mine field. 

:grenade:


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## tech/a

*Re: Stop Loss is not always your friend....*

R/Y

Just on reading your post it appears your looking at systematic trading
OR
are you encompassing discretionary trading in the same
bundle with your interpretations of signal and risk management?

Which is correct?

Will have time to devote to this in discussion form tonight.


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## DeepState

*Re: Stop Loss is not always your friend....*



tech/a said:


> R/Y
> 
> Just on reading your post it appears your looking at systematic trading
> OR
> are you encompassing discretionary trading in the same
> bundle with your interpretations of signal and risk management?
> 
> Which is correct?
> 
> Will have time to devote to this in discussion form tonight.




Hi T/A

There is no correct about this.  It's just the way I think about things like this if asked to get a bit serious.  I find it is helpful to consider the issue by dividing an investment process into money making and risk management components.  I think it is useful in a conversation about stops.  I acknowledge that there are different ways to consider the issues and define what represents a contribution to value-add.  We could readily be looking at the same thing, have an exactly matching understanding of what we are seeing and yet name different parts of the process different things.  Hence, we can agree to agree and yet disagree on why we agree.  Rumsfeld had nothing.

You have mentioned that you are a discretionary trader nowadays, albeit with a room full of knowledge and ability from various fields.  

A signal is anything which is a directional prediction.  Hence discretionary predictions are signals in their own right.  You do not even have to have a good reason.  "Oh, I reckon it's Monday and that's an up-day" is a buy signal on a discretionary basis, for example.  That says absolutely nothing about how good a signal it is.

One thing about time stops.  A signal almost always has a life-span.  You may find, for example, that the discretionary call tends to be strongest for a day, has less power over a week and is essentially defunct over a two week period.  That's still a signal - the call that a stock will move in a certain direction.  It just has a time frame for operation.  All signals are like this.  They don't forecast over an infinite time frame.   No stop is required to implement this.  The call just becomes weaker with time and can shut itself down at a particular time after making the call. I have just introduced a deeper concept here.  There is the directional prediction and the confidence in that prediction.  A signal is actually a combination of both.  Not necessarily just Buy/Sell but possibly also a spectrum between the High-Conviction Buy and Sell extremes.  Hence, as your predictive ability declines with time, we can say that I expect a stock to go up, but that my confidence wanes with the passage of time with new information changing the landscape.  Alternatively, you can say that my signal is only good till close.  Same deal, different clothes.  In other words, a time stop is actually part of a signal and we should set it apart from risk management if this framework is to be utilised.

Cheers

RY


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## tech/a

*Re: Stop Loss is not always your friend....*



> A 'signal' is the attempt to discern market movement.  It is a directional prediction on something. The signal has power if it actually predicts accurately to some degree.  It can be worthless if it has no predictive value at all.  Worse, behavioural biases can lead signal value for investors to be negative.  A signal can be anything that purports to be a prediction.  It can be the length of skirts to a 50 page valuation or 1 million lines of code in a neural net algo, to a 20% Flipper.  It doesn't matter what generates a prediction for these purposes.  A signal is a predictor.  If you give up, your predictor goes to zero.




So far so good. I prefer to use the word anticipation as I don't actually know where I'm going to exit (At the time of entering) but for ease of description---



> 'Risk Management' is any activity which determines position sizing.




Broadly I think its more than that --- various risks(Capital/Time/Portfolio/Opportunity/Trade/Market Liquidity and believe it or not Macro Fundamental risk)---to which effect what I do. 



> Risk management does not make money



. In itself no but as a variable yes in the contexts of Risk/s I look at I think it does help It may skew a method from loss to profit---in the context of Risk Factors i consider. 



> If your signal is static electricity, no amount of risk management will improve your expected return.  It can change the shape of your probability distribution, but it cannot change the expected return.




I think it a poor example but I presume you mean a which has no directly logical reason for an entry in a stock to be taken.



> In other words, with no ability to know where the markets are going at all, you have no expected return.  Just whacking a 5% stop on it doesn't add any value whatsoever in terms of expected outcome.  It just changes the pathway.




Again a broad brush.

If completely random I agree---I think---I haven't tested your theory to give me an outcome---but I have seen evidence of a simple filter and then a random entry having a positive expectancy.

I remember seeing a test once which returned a positive expectancy where all members of the data set were showing a positive up trend. The buy signal was Thursday. The results were improved with your explanation of Money Management. I didn't keep it but would have been perfect for this argument.There are other tests I have seen based on nothing more than a time of day. While not brilliant they returned a positive expectancy.
I'm sure they are out there and I'm sure they could be replicated---I don't have the time or inclination to do so---but if I find one ill be sure to post it up.




> Setting stops, trailing stops etc. just changes the pathway, but not the expected trajectory of the pathway.  I call this bending/reshaping the distribution.  You can change position sizes, implement different ones in rotation each Thursday...same deal.  No change in expected outcome.




Yes agree with regard to expected outcome. A combination of risk minimizing factors can have quite an effect on trading results.

Broadly in agreement I guess.




> Over to you.


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## DeepState

*Re: Stop Loss is not always your friend....*



tech/a said:


> So far so good. I prefer to use the word anticipation as I don't actually know where I'm going to exit (At the time of entering) but for ease of description---
> 
> 
> 
> Broadly I think its more than that --- various risks(Capital/Time/Portfolio/Opportunity/Trade/Market Liquidity and believe it or not Macro Fundamental risk)---to which effect what I do.
> 
> . In itself no but as a variable yes in the contexts of Risk/s I look at I think it does help It may skew a method from loss to profit---in the context of Risk Factors i consider.
> 
> 
> 
> I think it a poor example but I presume you mean a which has no directly logical reason for an entry in a stock to be taken.
> 
> 
> 
> Again a broad brush.
> 
> If completely random I agree---I think---I haven't tested your theory to give me an outcome---but I have seen evidence of a simple filter and then a random entry having a positive expectancy.
> 
> I remember seeing a test once which returned a positive expectancy where all members of the data set were showing a positive up trend. The buy signal was Thursday. The results were improved with your explanation of Money Management. I didn't keep it but would have been perfect for this argument.There are other tests I have seen based on nothing more than a time of day. While not brilliant they returned a positive expectancy.
> I'm sure they are out there and I'm sure they could be replicated---I don't have the time or inclination to do so---but if I find one ill be sure to post it up.
> 
> 
> 
> 
> Yes agree with regard to expected outcome. A combination of risk minimizing factors can have quite an effect on trading results.
> 
> Broadly in agreement I guess.





Heck Tech (A)...I think we agree to broadly agree.  That's a relief.

Anyhow, to your recollection of Thursdays as a signal...

There are probably as many rules that make money as there are grains of sand...in the past.  Vanstone with his neural net could probably generate a fair chunk of them by changing inputs and the internal structure of the net as well as the training methods.  What happened in the past is interesting like history of the American Revolution is interesting.  However, saying that it is predictive is an entirely different thing. There is a vast gap.

There actually is a daily seasonal for the ASX 200, for example, that is statistically significant. Fridays are significantly different.  However, the gap is so small you cannot trade it in terms of arbitrage.

I, or KTP amongst others, could generate a MA type signal where the two variables are short and long term averaging periods.  By varying these over the infinite space, a meaningful parts of the possible combinations will appear profitable.  Run it through with those same fixed variables and things will not stay the same.  The underlying can be anything that moves.  We can generalize to any type of rule making process.  Some combination of input variables will produce profit for anything approximating an attempt at a decision rule.  That is a given and there is nothing special about the decision rule just because some profitable combination of variables exist.  What matters is whether that decision structure and set of parameters has any reason at all for being useful on a forward looking basis.  

On other bits:

Static, to people like me, means random noise.  Flipping coins, dice, pulling numbers out of a barrel...as a basis for forecasting/prediction.  There is absolutely nothing in it that is predictive, but it is a signal anyway.


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## tech/a

*Re: Stop Loss is not always your friend....*

Yes---and your point being?


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## DeepState

*Re: Stop Loss is not always your friend....*



tech/a said:


> Yes---and your point being?




Stop loss is not expected to be your friend.....on average, through time.


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## tech/a

*Re: Stop Loss is not always your friend....*



DeepState said:


> Stop loss is not expected to be your friend.....on average, through time.




Hmm 
Don't think it's as clear cut as that
Your implying that unless you have an
Entry that is better than random then
Any sort of stop is simply pointless
The entry is the focus

Am I reading that correctly ?


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## DeepState

*Re: Stop Loss is not always your friend....*



tech/a said:


> Hmm
> Don't think it's as clear cut as that
> Your implying that unless you have an
> Entry that is better than random then
> Any sort of stop is simply pointless
> The entry is the focus
> 
> Am I reading that correctly ?




On average, there is zero alpha.  Trading is generally regarded as extracting alpha given the time frames are very short and risk from trading completely dominates anything else.  When you have zero alpha, which is the population average alpha (ie no idea what the entry points should be) then no amount of risk management is going to make you money.

If you have got an idea of what superior entry points should be, the addition of stops will actually decrease your expected return.

On the other hand, if you are a wanton value destroyer (essentially taking the opposite positions of the people with an idea of what is going on), then stop losses will add value by helping you to stop losing value.  The stop should be so tight that you never trade.

The relationship between having stops at the entry point when you are a value destroyer and having no stops when you are a value creator should be evident.

If your entry points are selected by chook raffle or listening to static electricity on your AM band radio, having super-tight stops or no stops produces the same expected outcome....zero, before expenses.

The above is only talking about money making and says nothing about risk adjusted returns.  Stops do not add value on a population average in these terms.

It is reasonably argued that they can add value in psychological ways by helping you sleep at night.  Further, if you do not value a loss and gain as equals, it can help on that.  However, these are issues of psychology and not outright money making.

The original statement I made was that some tech practitioners, including those who publish and are widely followed in discussion and courses, seem to think adding stops makes you money just by doing it (on average, through time).  It does not. Individual outcomes may yield that result as tossing coins will yield profit sometimes, but there is no systematic profit to it.  That's all I'm claiming on this thread.


----------



## tech/a

*Re: Stop Loss is not always your friend....*



DeepState said:


> On average, there is zero alpha.  Trading is generally regarded as extracting alpha given the time frames are very short and risk from trading completely dominates anything else.  When you have zero alpha, which is the population average alpha (ie no idea what the entry points should be) then no amount of risk management is going to make you money.




You are benchmarking this against what?
Any profit at all?



> If you have got an idea of what superior entry points should be, the addition of stops will actually decrease your expected return.




You know this how?




> On the other hand, if you are a wanton value destroyer (essentially taking the opposite positions of the people with an idea of what is going on), then stop losses will add value by helping you to stop losing value.  The stop should be so tight that you never trade



.

Sorry I don't see this having meaning---is it a sarcastic comment?



> The relationship between having stops at the entry point when you are a value destroyer and having no stops when you are a value creator should be evident



.

Well they're not--what is a value destroyer--how do I destroy value?
What's is a value creator--how do I create value?



> If your entry points are selected by chook raffle or listening to static electricity on your AM band radio, having super-tight stops or no stops produces the same expected outcome....zero, before expenses.




Hardly an argument of value when looking at whether stops are important in helping skew your numbers your way---as I don't know of anyone on the planet who uses such entries??



> The above is only talking about money making and says nothing about risk adjusted returns.  Stops do not add value on a population average in these terms.




Again a broad brush---how do you know this?



> It is reasonably argued that they can add value in psychological ways by helping you sleep at night



. 

Agree



> Further, if you do not value a loss and gain as equals, it can help on that.  However, these are issues of psychology and not outright money making.




Sorry don't agree.
If we are to let profit's run and cut losses short one way is to introduce trailing stops.



> The original statement I made was that some tech practitioners, including those who publish and are widely followed in discussion and courses, seem to think adding stops makes you money just by doing it (on average, through time).




I don't know of anyone who says this---can you give an example?



> It does not. Individual outcomes may yield that result as tossing coins will yield profit sometimes, but there is no systematic profit to it.  That's all I'm claiming on this thread.




So back to random.

*Questions.*

(1) Can the inclusion of stops(any of Initial stop/Breakeven stop/Trailing stop---blah blah---skew a method which has an entry which is designed to identify a potential movement in the direction of a desired trade---more toward a profit or in fact increase profit from a method where an exit is the only way to close out a trade---in your view??

(2) Are stops a complete waste of time---any stop in any situation?


----------



## DeepState

*Re: Stop Loss is not always your friend....*



tech/a said:


> You are benchmarking this against what?
> Any profit at all?




Cash



tech/a said:


> You know this how?




Options pricing.




tech/a said:


> Sorry I don't see this having meaning---is it a sarcastic comment?




Not attempting to be sarcastic.  If you (this is a general reference, as in plural.  Not targeted at you) are actually hindered and do the opposite of making money (behavioural biases can cause this) then you are better off not trading at all.  Stops add value to these kinds of people by stopping them from trading at all.

I should add, all of this relates to the kinds of stops that reduce position size. 




tech/a said:


> Well they're not--what is a value destroyer--how do I destroy value?
> What's is a value creator--how do I create value?




Value is defined as making money over cash.  You create value by having predictive ability and deploying it into markets.  This can come from certain types of technical analysis, fundamental analysis, combinations, information arbitrage...anything which has an effective edge in the market.




tech/a said:


> Hardly an argument of value when looking at whether stops are important in helping skew your numbers your way---as I don't know of anyone on the planet who uses such entries??




Static and coin tosses, monkeys with darts...are all analogies (albeit doable) for a prediction process that has no value.  People do fundamental and technical analysis.  Just because they do doesn't mean that this is a license to print money.  The value of most of it is actually zero.  



tech/a said:


> Again a broad brush---how do you know this?




It is a tautology.  No maths is required or any simulations.  




tech/a said:


> Sorry don't agree.
> If we are to let profit's run and cut losses short one way is to introduce trailing stops.




If your position is expected to go up and you have predictive ability, stopping out via trailing stop destroys value on average through time.  Options pricing.




tech/a said:


> I don't know of anyone who says this---can you give an example?




Mr NR.  "Successful Stock Trading - A Guide to Profitability". Chapter 1. An example is given relating to an Excel simulation which leads on to all sorts of stuff on win/loss ratio at the expense of winning percentage.  You can make of it what you will.  Clearly a lot of people believe this.  It might be fruitful to ask Kris to check the maths behind the simulation and the claims. I will not comment further. 



tech/a said:


> So back to random.




The average player is effectively random in alpha terms.  It is a tautology.


*Questions.*



tech/a said:


> (1) Can the inclusion of stops(any of Initial stop/Breakeven stop/Trailing stop---blah blah---skew a method which has an entry which is designed to identify a potential movement in the direction of a desired trade---more toward a profit or in fact increase profit from a method where an exit is the only way to close out a trade---in your view??




Adding stops etc. changes the distribution of expected outcomes.  You can skew it anyway you like.  If you have skill, the kind of stop which involves cutting positions will net destroy value in terms of money making expectations.  For example, you can start with an initial stop loss and roll up to B/E.  If you have skill, this will lose you money.  It will, however, do this by producing a string of small losses and a smaller number of gains, some of which can be large.




tech/a said:


> (2) Are stops a complete waste of time---any stop in any situation?





No. They are valuable.  I am only saying they don't make money on average.
Using them in the manner you described increases the chances that you will make money over the longer term if you have skill. It does this at a cost to your expected return at the outset.
If you have liquidity issues or leverage issues, their value is present just to keep you alive, if you have an edge.
Nothing can save you in the longer term if you have no predictive value or are a wanton value destroyer (generic).

-----

All I am saying is that stops do not make a person money in and of themselves on average, through time.  That's it.


----------



## systematic

*Re: Stop Loss is not always your friend....*



DeepState said:


> ...but there is no systematic profit to it.  That's all I'm claiming on this thread.




Agree - there's no systematic profit to stop losses.  I'm not sure how someone could argue otherwise.

Potential for stop losses to reduce volatility & drawdown is possibly worth looking at.  I've avoided them completely until recently, but only in relation to volatility (and really, drawdown) reduction.  Some market states will see that costing you some profit though.  For me it's a personal decision re: whether the risk of profit reduction is greater or less than the potential for draw down reduction.


----------



## DeepState

*Re: Stop Loss is not always your friend....*



systematic said:


> For me it's a personal decision re: whether the risk of profit reduction is greater or less than the potential for draw down reduction.




Bingo.  I use stops.


----------



## skyQuake

*Re: Stop Loss is not always your friend....*

I would argue that if say you are an amazing trader with great expectancy, and your stops are based on signals rather than fixed x% away, you are actually adding value as the stop is in effect another 'trade'.


----------



## tech/a

*Re: Stop Loss is not always your friend....*



DeepState said:


> Cash




Ok about 2%



> Options pricing.




I've lost the value of introducing a completely different instrument to the discussion of stops in Stock Trading.




> Not attempting to be sarcastic.  If you (this is a general reference, as in plural.  Not targeted at you) are actually hindered and do the opposite of making money (behavioural biases can cause this) then you are better off not trading at all.  Stops add value to these kinds of people by stopping them from trading at all.




Wow that's really encompassing everyone with zero knowledge.
While some gamble the stock market most wouldn't use any sizable funds. I really don't think this discussion was ever meant to encompass total novices---well I didn't.



> I should add, all of this relates to the kinds of stops that reduce position size.




Hang on an arbitrary Ill buy 10000 CBA is a stop in itself.
Another example.
I can have No stop and at the point of X place a stop at B/E



> Value is defined as making money over cash.  You create value by having predictive ability and deploying it into markets.  This can come from certain types of technical analysis, fundamental analysis, combinations, information arbitrage...anything which has an effective edge in the market.




Well with the experience I have with Systems testing I have seen improvement in all with the addition of stops. (Tautology)





> Static and coin tosses, monkeys with darts...are all analogies (albeit doable) for a prediction process that has no value.  People do fundamental and technical analysis.  Just because they do doesn't mean that this is a license to print money.  The value of most of it is actually zero.




Yes I agree that most actually lose---but I wouldn't say it could be directly related to placing stops.




> It is a tautology.  No maths is required or any simulations



.  

Ok



> If your position is expected to go up and you have predictive ability, stopping out via trailing stop destroys value on average through time.  Options pricing.




Again I cant see the benefit of comparing with options.
You have all sorts of stuff to consider with options--time decay in the money out of the Money At the money options. How does this help in the discussion.---are we talking options?



> Mr NR.  "Successful Stock Trading - A Guide to Profitability". Chapter 1. An example is given relating to an Excel simulation which leads on to all sorts of stuff on win/loss ratio at the expense of winning percentage.  You can make of it what you will.  Clearly a lot of people believe this.  It might be fruitful to ask Kris to check the maths behind the simulation and the claims. I will not comment further.




Ill have a look. But why is it CLEAR a lot of people believe anything?




> The average player is effectively random in alpha terms.  It is a tautology.




Negative I would suggest---net losers.

*Questions.*





> Adding stops etc. changes the distribution of expected outcomes.  You can skew it anyway you like.  If you have skill, the kind of stop which involves cutting positions will net destroy value in terms of money making expectations.  For example, you can start with an initial stop loss and roll up to B/E.  If you have skill, this will lose you money.  It will, however, do this by producing a string of small losses and a smaller number of gains, some of which can be large.





Disagree

My experience is that the END reward to Risk is actually increased as we have not only really small losses we also have No loss (other than Brokerage) on losses and accumulated winners (Profit) far exceeds Accumulated Losses.
In fact 1 win can demolish many B/E stop outs and many small losses. The number of trades required to claw back a string of losses is far less than if I had a stop only and way way less if I didn't have one at all.
----Tautology





> No. They are valuable.  I am only saying they don't make money on average.
> Using them in the manner you described increases the chances that you will make money over the longer term if you have skill. It does this at a cost to your expected return at the outset.




Perhaps in some circumstances but the exact opposite in others.



> If you have liquidity issues or leverage issues, their value is present just to keep you alive, if you have an edge.




Yes can be the case but need not be a sole reason



> Nothing can save you in the longer term if you have no predictive value or are a wanton value destroyer (generic).




If I read this as complete gambling novice --yes.
-----



> All I am saying is that stops do not make a person money in and of themselves on average, through time.  That's it.




Ok but I don't think this discussion has helped those who think they have an edge ---don't use stops and have found that their portfolio is anything but impressive due to a few really destructive losses.

EG GALUMAY


----------



## DeepState

*Re: Stop Loss is not always your friend....*



skyQuake said:


> I would argue that if say you are an amazing trader with great expectancy, and your stops are based on signals rather than fixed x% away, you are actually adding value as the stop is in effect another 'trade'.




With that caveat...'and your stops are based on signals'...I am on the same page.  This is where it comes to a definition.  Stops as you propose are actually predictions as they are based on informative signals.  It's like the reverse of an initiation that was formed via informed signal. You are just initiating another informed trade which offsets the first one. In the context of the recent exchange where stops are expressed as risk management only (ie. no predictive ability in an of themselves), they don't add value.

If you have predictive ability, skyQ is the limit.


----------



## DeepState

*Re: Stop Loss is not always your friend....*



tech/a said:


> I've lost the value of introducing a completely different instrument to the discussion of stops in Stock Trading.




A stop is a binary put option with the stock as an underlying.  It is insurance. 




tech/a said:


> Wow that's really encompassing everyone with zero knowledge.
> While some gamble the stock market most wouldn't use any sizable funds. I really don't think this discussion was ever meant to encompass total novices---well I didn't.




You don't have to be a novice to be a value destroyer or have static as your prediction.  Bogle is hardly a novice or lacking in knowledge, for example.  He led Vaguard.  They don't exactly have small AUM.  Buffett will move all his estate into index funds and cash.  Hardly the action of an inexperienced person, I would think.   




tech/a said:


> Hang on an arbitrary Ill buy 10000 CBA is a stop in itself.
> Another example.
> I can have No stop and at the point of X place a stop at B/E



Exactly.  All of these are arbitrary random positions.  No information, no expected return.




tech/a said:


> Well with the experience I have with Systems testing I have seen improvement in all with the addition of stops. (Tautology)




When a person datamines, they will get these results.  I can find profit with stops in backtests of static electricity and coin flips of any length.  It's no skill whatsoever to find this. Stops are not expected to add value on average through time for the market as a whole.  That is a tautology.  It is also a tautology that if you torture data long enough, it will say whatever you want.  Stops decision rules will be found that work on any dataset including white noise and stops will also be found that destroy value.  It's no big deal at all, it exists in everything, and their existence says nothing about making money.




tech/a said:


> Yes I agree that most actually lose---but I wouldn't say it could be directly related to placing stops.




Most actually lose because alpha is zero sum less expenses.  Stops do not add value on average through time.  They don't subtract value on average through time either.



tech/a said:


> Again I cant see the benefit of comparing with options.
> You have all sorts of stuff to consider with options--time decay in the money out of the Money At the money options. How does this help in the discussion.---are we talking options?



Stops actually are options.



tech/a said:


> Ill have a look. But why is it CLEAR a lot of people believe anything?



I read ASF.




tech/a said:


> Negative I would suggest---net losers.



After expenses, yes. Before expenses, no.

*Questions.*






tech/a said:


> My experience is that the END reward to Risk is actually increased as we have not only really small losses we also have No loss (other than Brokerage) on losses and accumulated winners (Profit) far exceeds Accumulated Losses.
> In fact 1 win can demolish many B/E stop outs and many small losses. The number of trades required to claw back a string of losses is far less than if I had a stop only and way way less if I didn't have one at all.
> ----Tautology



That's a tautology if your world is devoid of probability and focuses on selected outcomes only. However, the very fabric of the universe is probabilistic. You will find these things occur, but the expectations inferred in terms of money making ability do not follow. 

That set of examples is exactly the belief that has been espoused in the prior referred book.  This statement is exactly why I believe people believe in this argument.  Please ask Kris to check the maths or Vanstone.  Or get someone on this site who knows about option pricing using binomial lattices or some other risk-neutral stochastic model to jump in. When you buy an option, is it free? I will say no more.




tech/a said:


> Perhaps in some circumstances but the exact opposite in others.




Yes. However, any single draw will yield a bunch of different results.  One bad trade does not make you an idiot.  One good one will see people strut around, but doesn't actually make them good.  We need to work in expectations.  Talking about possibilities without attaching probabilities is worth very little short of saying "you could lose all you money" or "you could become seriously rich".  It is a known behavioral bias that we focus on attention-grabbing scenarios to the detriment of attaching probability.  Both are important to make an informed decision.




tech/a said:


> Ok but I don't think this discussion has helped those who think they have an edge ---don't use stops and have found that their portfolio is anything but impressive due to a few really destructive losses.




What matters is whether a person actually has an edge.  What a person thinks only matters if they can actually back it with outcome.  If you (generic) don't know that you don't know, you're cactus. If you know that you don't know, at least you know something and can build from there.  The 'mortality rate' of posters since the inception of ASF might provide some evidence that belief in personal skill and actual possession of skill that matches that belief are somewhat weakly related.

The posts that Gulamay has made in terms of hard data is insufficient to make any strong assertions from my point of view.

----

Tech/A.  Stops do not add value in expectations terms.  They will not add value in and of themselves on average, through time.  That's it.  I might step off now as I think I've said all I'd like to about the main aspects of this point.   Seems like we do have some common ground though and that is good to find.  On the rest, I guess we can agree to disagree.

Systematic and SkyQuake made very specific and nuanced statements which tell me they are familiar with the arguments and issues.

Thanks a lot for the exchange.


----------



## DeepState

*Re: Stop Loss is not always your friend....*



DeepState said:


> A stop is a binary put option




My bad.  It's just a regular option payoff, although it exercises on touch and is of unstated maturity.  It's still a form of insurance.


----------



## tech/a

*Re: Stop Loss is not always your friend....*



DeepState said:


> With that caveat...'and your stops are based on signals'...I am on the same page.  This is where it comes to a definition.  Stops as you propose are actually predictions as they are based on informative signals.  It's like the reverse of an initiation that was formed via informed signal. You are just initiating another informed trade which offsets the first one. In the context of the recent exchange where stops are expressed as risk management only (ie. no predictive ability in an of themselves), they don't add value.
> 
> If you have predictive ability, skyQ is the limit.




But that's where a stop is placed---where you know clearly your analysis is wrong????



> In the context of the recent exchange where stops are expressed as risk management only (ie. no predictive ability in an of themselves), they don't add value



.

This is something you have adopted and was never expressed by the Duck!
I think you've created an argument around a topic which you have designed.


Not enough time today or tonight to continue but-----*But that's where a stop is placed---where you know clearly your analysis is wrong????* That's why its there!

You don't take a random trade then place a random get out of jail point.
Some do ---gamblers-----and end up with bottom draw stocks---to afraid to cop it sweet.

I certainly take issue with some of your statements
particularly when as someone who initially said you liked hard evidence you have defaulted to tautology.

While you may disagree I certainly don't agree.


----------



## burglar

*Re: Stop Loss is not always your friend....*

I read it, but failed to comprehend it.
Am I alone in this?

Wiki: Tautology (logic)




> In logic, a tautology (from the Greek word ταυτολογία) is a formula that is true in every possible interpretation.
> 
> Philosopher Ludwig Wittgenstein first applied the term to redundancies of propositional logic in 1921; (it had been used earlier to refer to rhetorical tautologies, and continues to be used in that alternate sense). A formula is satisfiable if it is true under at least one interpretation, and thus a tautology is a formula whose negation is unsatisfiable ...


----------



## DeepState

*Re: Stop Loss is not always your friend....*



tech/a said:


> I certainly take issue with some of your statements
> particularly when as someone who initially said you liked hard evidence you have defaulted to tautology.
> 
> While you may disagree I certainly don't agree.




Alpha, which is what we are talking about, is a zero sum game before expenses.  Proving it is like saying prove +1 + (-1) = 0. There's the hard data if required. If your simulations do not prove that result, it is the simulations that are somehow wrong. Perhaps I can defer to a higher authority than myself.  The attached link is to the Nobel Lecture presented by William Sharpe in 1990 for his theories which were the foundations of the idea of alpha.  You are looking for equations 9, 10 and 11.  It is a tautology.  There is no requirement for simulation.  You can apply this concept to any market.

If your stops are directionally informed, it is the informed prediction that is making you money.  If you have no idea, then you have no idea when your idea is actually wrong and you can stick a stop anywhere you like without expectation of value add.  Stops do not add value in and of themselves on average, through time.  The only thiong that makes money is accurate prediction of a price.

http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1990/sharpe-lecture.pdf

I can't follow a Nobel, so I'm off.  Cheers.


----------



## galumay

*Re: Stop Loss is not always your friend....*



tech/a said:


> Ok but I don't think this discussion has helped those who think they have an edge ---don't use stops and have found that their portfolio is anything but impressive due to a few really destructive losses.
> 
> EG GALUMAY




I imagine that stop losses are more likely to be in the toolkit of those with a technical bent or traders. It certainly wouldnt work for a long term fundamental investor like me, stops would have taken out nearly all my positions - and turned potential gains into real losses. It would have also realised small losses in other positions I still hold, and dont want to sell.


----------



## lesm

*Re: Stop Loss is not always your friend....*



galumay said:


> I imagine that stop losses are more likely to be in the toolkit of those with a technical bent or traders. It certainly wouldnt work for a long term fundamental investor like me, stops would have taken out nearly all my positions - and turned potential gains into real losses. It would have also realised small losses in other positions I still hold, and dont want to sell.




Hi Galumay
If you changed the reference to 'stop loss' to a form of exit strategy, would that change your point of view?


----------



## galumay

*Re: Stop Loss is not always your friend....*



lesm said:


> Hi Galumay
> If you changed the reference to 'stop loss' to a form of exit strategy, would that change your point of view?




I would understand that a stop loss is a form of exit strategy, I have exit strategies for my positions, and they reference my dynamic fundamental analysis. It's not a stop loss though.


----------



## lesm

*Re: Stop Loss is not always your friend....*



galumay said:


> I would understand that a stop loss is a form of exit strategy, I have exit strategies for my positions, and they reference my dynamic fundamental analysis. It's not a stop loss though.




Thanks, your first sentence answered my question.

Markets are dynamic. This raises the question about what are commonly defined as 'stop losses', which are static in their current application, as used by a wide range of traders, are the appropriate method without taking market dynamics into consideration.

Having traded spot and indices during the GFC led me to think that there has to be a better way. This led up to working on a more appropriate way to manage downside risk.

It's interesting that when people see references to trading without stops bring out the holy trading bible about stop losses but fail to realise that there are a range of traders doing this and successfully trade in this manner. Some may have soft stops or an exit strategy that is applied when a trade goes sour. Alternatively they may use recovery strategies that are designed to recover the position.

When I saw this topic come up I thought it may start going into some of these areas, looking at the last couple of posts it between tech/a and RY, it does not appear that it will.

To employ these kind of approaches, requires three key ingredients:
1. Risk management
2. Money management
3. Discipline.
The undisciplined trader will fail number 3 and possibly 1 & 2 as well. Therefore they should stick to the traditional 'stop loss' approach.
Just added some food for thought.


----------



## tech/a

*Re: Stop Loss is not always your friend....*

If anyone can show me how to make a profit in Stocks (not arbitrage) other than

(1) More Aggregate winning profit than aggregate losing losses.
OR
(2) Larger Total Aggregate wins than Total Aggregate losses.
OR
(3) A mixture of both. 

This is Trembling Hands scatter chart again.




So this guy is one of ASF's leading traders and is a Prop trader.

Lets have a look at his first area marked.
Clearly (1)
Second Area a losing section and its clear why.
The Third area Clearly (2)

*Now tell me he is not trying to skew his returns by cutting his losses---*

The Red line is B/E all under that are his trades out of the position/s---Exits or Stops. This is where he believes he is no longer reading what he thought he was reading at the time of the trade. Exits or Stops.
Ill say it again Stops ---or exits what ever you want to call something below your initial trade point should be taken when its clear (to you) your analysis is wrong.

Please also tell me why and where the adage---cut your losses and let your profits run is wrong?

Is Keep your losses and let your profits run more correct?

There is much to read through and answer but Id like to know what the learned crew here think of the above.


----------



## tech/a

*Re: Stop Loss is not always your friend....*



DeepState said:


> Alpha, which is what we are talking about, is a zero sum game before expenses.  Proving it is like saying prove +1 + (-1) = 0. There's the hard data if required. If your simulations do not prove that result, it is the simulations that are somehow wrong. Perhaps I can defer to a higher authority than myself.  The attached link is to the Nobel Lecture presented by William Sharpe in 1990 for his theories which were the foundations of the idea of alpha.  You are looking for equations 9, 10 and 11.  It is a tautology.  There is no requirement for simulation.  You can apply this concept to any market.
> 
> If your stops are directionally informed, it is the informed prediction that is making you money.  If you have no idea, then you have no idea when your idea is actually wrong and you can stick a stop anywhere you like without expectation of value add.  Stops do not add value in and of themselves on average, through time.  The only thiong that makes money is accurate prediction of a price.
> 
> http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1990/sharpe-lecture.pdf
> 
> I can't follow a Nobel, so I'm off.  Cheers.





You've made a complete argument of your own design to prove with your own argument.
Its just of no value to this discussion. It is of itself--designed by you and argued by you???


----------



## tech/a

*Re: Stop Loss is not always your friend....*



galumay said:


> I imagine that stop losses are more likely to be in the toolkit of those with a technical bent or traders. It certainly wouldnt work for a long term fundamental investor like me,




You don't know this. It would also have removed a large chunk of your losses so far.
You would not be suffering from Opportunity Cost.


> stops would have taken out nearly all my positions - and turned potential gains into real losses



.

Where would you have placed stops? At a point where you knw you were wrong---OR are you not wrong yet in one single trade?

IE You havent made a loss until you have liquidated it?



> It would have also realised small losses in other positions I still hold, and dont want to sell.



Again your not thinking much about placing a stop. To you its a random position and you think its going to cause you small looses---infinitum.


----------



## burglar

*Re: Stop Loss is not always your friend....*

So far you have acquitted yourself pretty well!




Mr.T says,

"Children, remember your ABC.
Always be Cool!"


----------



## tech/a

*Re: Stop Loss is not always your friend....*



lesm said:


> Thanks, your first sentence answered my question.
> 
> Markets are dynamic. This raises the question about what are commonly defined as 'stop losses', which are static in their current application, as used by a wide range of traders, are the appropriate method without taking market dynamics into consideration.
> 
> Having traded spot and indices during the GFC led me to think that there has to be a better way. This led up to working on a more appropriate way to manage downside risk.
> 
> It's interesting that when people see references to trading without stops bring out the holy trading bible about stop losses but fail to realise that there are a range of traders doing this and successfully trade in this manner. Some may have soft stops or an exit strategy that is applied when a trade goes sour. Alternatively they may use recovery strategies that are designed to recover the position.
> 
> When I saw this topic come up I thought it may start going into some of these areas, looking at the last couple of posts it between tech/a and RY, it does not appear that it will.
> 
> To employ these kind of approaches, requires three key ingredients:
> 1. Risk management
> 2. Money management
> 3. Discipline.
> The undisciplined trader will fail number 3 and possibly 1 & 2 as well. Therefore they should stick to the traditional 'stop loss' approach.
> Just added some food for thought.





Yes I agree that there are particularly in Future traders who don't use a stop---as such.
Would like to hear more from you on your slant on the topic.

This all came about from my belief that I could help Gulamay as his 3 big losses smash his trading profit.


----------



## galumay

*Re: Stop Loss is not always your friend....*



tech/a said:


> You don't know this. It would also have removed a large chunk of your losses so far.
> You would not be suffering from Opportunity Cost.




Fair enough, I dont KNOW it, but I am reasonable confident its the case, I am not aware of long term, fundamental investors that advocate stop losses. 



> Where would you have placed stops? At a point where you knw you were wrong---OR are you not wrong yet in one single trade?
> 
> IE You havent made a loss until you have liquidated it?




Difficult question, given that I dont use stops! I am assuming that if placed they would be at a price lower than the purchase price, and given that even the best performers in my portfolio spent some time in negative territory, they would have been stopped out. 

The point that I was wrong was in the timing - in hindsight! Thats OK though time in the market will look after the timing as long as the fundamentals are there. Obviously a loss isnt made until its realised, just as profits are paper until real. 



> Again your not thinking much about placing a stop. To you its a random position and you think its going to cause you small looses---infinitum.




You are right, I am not thinking much about placing a stop, because they are not one of my tools. I know that its not a random position, and i dont believe its always going to cause a loss, I just dont see how it fits in with a long term buy and hold strategy and I cant say I have ever seen anyone argue for its use in that way.


----------



## tech/a

*Re: Stop Loss is not always your friend....*



galumay said:


> Fair enough, I dont KNOW it, but I am reasonable confident its the case, I am not aware of long term, fundamental investors that advocate stop losses.




As we all are when we decide to take a trade.
I must admit my confidence is strongest when in profit. 





> Difficult question, given that I dont use stops! I am assuming that if placed they would be at a price lower than the purchase price, and given that even the best performers in my portfolio spent some time in negative territory, they would have been stopped out.




Placing a stop doesn't always guarantee you'll be stopped out.



> The point that I was wrong was in the timing - in hindsight! Thats OK though time in the market will look after the timing as long as the fundamentals are there.




Witha 50% reduction in price fundamentals could change at anytime!

*Obviously a loss isnt made until its realised, just as profits are paper until real.* 

*THIS IS ONE OF THE BIGGEST NOOB MISCONCEPTIONS *

Go to a bank and walk in with a portfolio of $100K un realised profits and ask for a 100K loan with it as security
Now walk into the same bank with a portfolio of $100k un realised losses as security and ask for a loan.

Why is the 100K un realised profits actual profit to a bank and why are the 100k losses veiwed as losses.

*ANSWER*
Todays liquidation value.Your portfolio is valued at what you can liquidate it at *TODAY*.
If you have a 50% loss its a loss. If you watch a profit go from $10K to 4K its a loss of $6K 





> You are right, I am not thinking much about placing a stop, because they are not one of my tools. I know that its not a random position, and i dont believe its always going to cause a loss, I just dont see how it fits in with a long term buy and hold strategy and I cant say I have ever seen anyone argue for its use in that way.




Now you have.

if you want different results than everyone else is getting you'll have to do something different!
But if no help is what you want and your happy then say so and people with new ideas not adopted by the likes of you---will stop suggesting them.---I have many others but buy and hold is fine for you---.


----------



## DeepState

*Re: Stop Loss is not always your friend....*



tech/a said:


> It is of itself--designed by you and argued by you???




It is flattering that you would think so. It was designed by Sharpe and Lintner.  They argued it in the mid-60s before I was born.  What they did was codified something that was around even before then, since the birth of capital markets.  So, though I sincerely wish I could have done something so masterful first, I did not. 

I learned these theories as Sharpe collected his Nobel. I used its offspring professionally. It works.  If the CAPM is of no value to this exchange, it has certainly found enough value elsewhere to compensate. You have already stated that for a winner there is a loser and on average we lose value (after expenses) {"Negative I would suggest---net losers"}.  You just explained alpha, which is a key part of CAPM whose equations I pointed out to you.  I guess we can sweep options pricing or out with it too as lacking value in this exchange...despite seeing that options have positive value in every exchange and insurance contracts aren't sold for free.  It was this way before I was born.  You probably have some insurance that you paid for.

Without those pillars, I cannot argue that stop losses fail to add value. I could not argue that they add value either.  We would be talking about a type of market that does not exist outside of cash so there would be no value to add or subtract unless you want to put a stop under the RBA O/N cash rate to sleep better at night.  

T/A, I'm just the messenger.  If you don't wish to hear the message from me (which you have also delivered to me in this thread and is being delivered all around you), that's fine.  It's been delivered.  It's just information.


----------



## Triathlete

*Re: Stop Loss is not always your friend....*



galumay said:


> Fair enough, I dont KNOW it, but I am reasonable confident its the case, I am not aware of long term, fundamental investors that advocate stop losses.
> 
> 
> You are right, I am not thinking much about placing a stop, because they are not one of my tools. I know that its not a random position, and i dont believe its always going to cause a loss, I just dont see how it fits in with a long term buy and hold strategy and I cant say I have ever seen anyone argue for its use in that way.





So you would like to see a position go from say $10k to $1 k in a buy and hold strategy because you like the company and then possibly wait... who knows how long for it to recover, you have then lost the ability to use your funds elsewhere to make money for you.(opportunity cost).In my opinion if you have made an incorrect decision or the market has gone against you for some reason I usually cut my losses at 15% regardless and use my funds elsewhere to try and pick another winner rather than trying to wait for the company to recover which could see the price continue to fall further and not recover for years. eg.TLS,WBC they took years to recover. Look at WOW now it has fallen already over 20% some who have been in this stock and ridden the trend and div payments could have exited say after 10% fall with profit and just wait to get back in soon at the lower price when it gets to the bottom again and ride the trend again as this is a top 20 company.....There is always a time to buy and a time to sell even in a buy and hold strategy.
 Just my opinion


----------



## tech/a

*Re: Stop Loss is not always your friend....*



> T/A, I'm just the messenger. If you don't wish to hear the message from me (which you have also delivered to me in this thread and is being delivered all around you), that's fine. It's been delivered. It's just information.




From an encouraging beginning to a disappointing end.

I guess those of us who constantly trade to increase our Reward to Risk will do so
ignorantly making the profits we cant possibly be making.


----------



## noirua

*Re: Stop Loss is not always your friend....*



tech/a said:


> From an encouraging beginning to a disappointing end.
> 
> I guess those of us who constantly trade to increase our Reward to Risk will do so
> ignorantly making the profits we cant possibly be making.




I hope people read that last sentence many times, at first, it does not make sense. The more times I read it the more times it is the case that the cap fits, hopefully not too often however.

On stop losses, they certainly work on ASX100 stocks, on ASX200 there is a chance of getting it wrong. On the micro-caps I feel it is best to forget stop losses as hardly traded stocks have lurkers. They leave a low price hoping to be the highest bidder at some stage and some unfortunate investor has a stop loss set - I put my hand up, it's what I do.

** have you voted below yet. We only need about 5,000 votes to catch up - hot foot it over there...


----------



## Wysiwyg

*Re: Stop Loss is not always your friend....*



Triathlete said:


> *eg.TLS,WBC they took years to recover*. Look at *WOW* now it has fallen already over 20% some who have been in this stock and ridden the trend and div payments could have exited say after 10% fall with profit and just wait to get back in soon at the lower price when it gets to the bottom again and ride the trend again as this is a top 20 company.....*There is always a time to buy and a time to sell even in a buy and hold strategy.*
> Just my opinion



That right time to buy/sell would have to be when the majority of money agrees price will move up, down and for how long. A dollar cost averaging system does not consider the right time but rather an accumulation of stocks over time. One persons stop loss may be another persons accumulation. In doing this strategy, stocks as highlighted are better candidates.


----------



## Triathlete

*Re: Stop Loss is not always your friend....*



Wysiwyg said:


> That right time to buy/sell would have to be when the majority of money agrees price will move up, down and for how long.
> 
> A dollar cost averaging system does not consider the right time but rather an accumulation of stocks over time.
> 
> One persons stop loss may be another persons accumulation. In doing this strategy, stocks as highlighted are better candidates.





Actually for myself I would look at my weekly and monthly charts to confirm my buy or sell.


Yes I can understand that strategy...do I think it is the most efficient way to allocate your capital...No.



Yes I can see that...but the stop loss or exit may also be showing the start of a change in trend so if you where then to start accumulating I would first want to know if the stock was in an uptrend, downtrend and which way it is likely to move so that you can take a position either long or short so you have the ability to make money whether the stock is moving up or down.

So if we take the WOW as the example it reached a high of $38.92 in April 2014 it then gave  a signal to exit in July 2014 $35.03 as the 10% stop loss or exit.

Do I think some one should have started accumulating the stock here?... No I do not because we cannot tell at this stage whether it will continue higher or go lower.

Why would you want to put money in if you do not know which way the stock is likely to go up or down and how far..I would prefer to get some confirmation first and then put my money in when the probabilities are stacked in my favour of having a successful trade and not the markets.

Since then the daily, weekly and monthly charts are all down indicating to me at least that WOW has further to fall as soon as the down trend has completed that's when I will be putting my money in and getting more shares for my cash.

If we had of started accumulating as was mentioned above (one persons stop loss is another persons accumulation) then that person now will be down $5 share in 5 months or 34.2% pa  does not seem like a smart move to me...but that's just my opinion.

My previous chart is on the WOW thread page 25 I think if you wish  to take a look at my own analysis
and some other charts from Rimtas and Tech/A.


----------



## craft

*Re: Stop Loss is not always your friend....*



tech/a said:


> (1) More Aggregate winning profit than aggregate losing losses.
> OR
> (2) Larger Total Aggregate wins than Total Aggregate losses.
> OR
> (3) A mixture of both.




This is the definition of a positive expectancy. Lots of people talk about positive expectancy and it is easy to understand as an 'outcome' but what produces a positive expectancy?  An edge I hear people say - but what is an edge? Well the normal answer seems to be anything that gives a positive expectancy, which just puts us into a loop, where the question of what is an edge doesn't need to be answered.

Do we need to understand what an edge is if we can observe its positive expectancy?  

If you don’t understand it how do you know if it has stopped working until after you observe its outcome as a negative expectancy and the damage is done to your account? 

If you are relying on edge identification purely through historical expectancy outcome, How accurate is your data? is it a valid positive expectancy or invalid data. 


Even if your data is perfect, how do you know it is a robust edge and not a data mined expectancy? Huge numbers of variables you can dream up will have positive expectancy on historical data just through randomness without any likelihood of future utility. 


Is it valid to only identify an edge as positive expectancy outcome?

If not, what than is an edge?  



DeepState said:


> The only thiong that makes money is accurate prediction of a price.
> 
> http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1990/sharpe-lecture.pdf
> 
> I can't follow a Nobel, so I'm off.  Cheers.




Are you saying the only possible edge is accurate prediction of price?

....

What's this got to do with stops?

IMO you cant define if stops are a risk/money management expense or an integral part of the process that creates your edge until you can define the 'cause' of your edge.


----------



## KnowThePast

*Re: Stop Loss is not always your friend....*

Apologies for being late to the party, I wanted to give this some proper research and time was short over the last week.

My intention was to run a few backtest that clearly show that stop losses are not your friend in a fundamentally oriented, long term portfolio. A little bit of bias on my side. I remember running some tests a long time ago that didn't inspire me, I thought I'll do it properly this time.

To start off with, I establish a benchmark - which is a return I would get by investing into all stocks in my universe. I set a period of 5 years, and it happened to give me a return of 68.41%.

Then, I select a strategy that beats the benchmark. Let's use the old and tried Net Assets. We buy when P/B < 0.7, we sell when P/B > 2. Position Size = 2%, brokerage = $30. Here's how it compares to the benchmark:




Higher return and more winners, but also more big losers. Nothing controversial so far. Let's now add stop losses to this winning strategy. I'll backtest on stop losses at 5%, 10% and 20%. Once stopped, share will not be bought again the next 365 days.  Here are the results:




Equity Curve:



Hold on, that's not right, not the result I was expecting. Perhaps it just happened to work with this strategy, let's try a low PE strategy. Equity curve:




An identical result to the P/B strategy - stop losses improve the result, and the tighter the stop loss the better.

How about trailing stop losses? Not so good:



I am limited to 5 attachments, to be continued in next post.


----------



## KnowThePast

*Re: Stop Loss is not always your friend....*

Then it dawned on me - I was assuming that a 5% stop loss would execute at a price exactly 5% (rounded to nearest $0.01) below purchase price, which is not going to be the case. So, I've put in 5% slippage, each 5% stop loss would actually execute at 10%, 10% at 15%, etc. This brought the result down, but still it is substantially above the benchmark:




I tried a High PE strategy, that underperforms the benchmark. I'll spare everyone looking at another graph - the result, again, was that stop losses improved the performance of even an underperforming strategy.

This analysis stands at complete odds with RY's statement that stop losses do not improve the expected return and are simply a risk management mechanism, which is likely to bring down returns, not improve them. When my analysis disagrees with RY, my default stance is that I made a mistake. What did I miss?

RY, how was your data backtested? I ask, because I know standard backtests that re-balance yearly may not be very suitable for testing stop losses.

I ran a P/B strategy for the last 6 months, with a 5% stop loss and 5% slippage. That beat the same strategy without stop loss by a whopping 16.13%. Attached is a spreadsheet with all the trades, in case anyone is kind enough to look at it and spot an error.

View attachment stoplossTrades.xlsx


----------



## DeepState

*Re: Stop Loss is not always your friend....*



craft said:


> This is the definition of a positive expectancy. Lots of people talk about positive expectancy and it is easy to understand as an 'outcome' but what produces a positive expectancy?  An edge I hear people say - but what is an edge? Well the normal answer seems to be anything that gives a positive expectancy, which just puts us into a loop, where the question of what is an edge doesn't need to be answered.
> 
> Do we need to understand what an edge is if we can observe its positive expectancy?
> 
> If you don’t understand it how do you know if it has stopped working until after you observe its outcome as a negative expectancy and the damage is done to your account?
> 
> If you are relying on edge identification purely through historical expectancy outcome, How accurate is your data? is it a valid positive expectancy or invalid data.
> 
> 
> Even if your data is perfect, how do you know it is a robust edge and not a data mined expectancy? Huge numbers of variables you can dream up will have positive expectancy on historical data just through randomness without any likelihood of future utility.
> 
> 
> Is it valid to only identify an edge as positive expectancy outcome?
> 
> If not, what than is an edge?
> 
> 
> 
> Are you saying the only possible edge is accurate prediction of price?
> 
> ....
> 
> What's this got to do with stops?
> 
> IMO you cant define if stops are a risk/money management expense or an integral part of the process that creates your edge until you can define the 'cause' of your edge.




An edge generates positive expectancy.  For this purpose, it doesn't matter what the edge is.  It is just something whose predictive power in relation to a price, over some time frame, is above zero.

You do not have to understand it.  There is no law of investment that says you need to.  However, not understanding it increases the chances that you are just using a data-mined outcome and thinking it has edge when it is actually static that has produced the outcome.  Expectancy is a concept of tendency.  Outcome is a draw from the distribution of possibilities around that tendency.  For every real predictive driver, there are many many more non predictive ones that can produce an outcome at least as good over some period by chance.

If you have a good notion of what drives the positive expectancy, you have a chance to know when the driver is broken.  For example, the dividend run-up phenomenon is stronger for franked stocks than not.  The reasons are obvious.  If the tax laws change, you do not need to wait 10 years for a statistically significant sample to be created.  You cut it on the announcement of the new legislation, before the next data point is collected, and move on.

You can derive a judgment on expectancy any way you like.  A lot of methods, including movement of hands, is visible just by scoping around the threads.  However, there are a great many ways to narrow in on whether what you are seeing is real or a statistical anomaly.  The people who actually do this for a living will observe the economic transmission channels through which the result is found to check for validity.  They will check it through time, around the world, through different regimes, through different types of stocks (value/growth/large/small/industries/foreign exposed/volatile...) even seeing how it might flow through balance sheets...as an example.  It gets much deeper, but you get the idea.   Basically, a statistical outcome is no-where near sufficient to say you have positive expectancy.  About 95% of the things that seemed interesting on first round are dismissed on further analysis, in my experience.  The stat is just a data point.  It is reasonable to use something even if the positive expectancy is not shown in the statistical data.  

You raise a good point about the definition of edge.  I defined it for myself and indicated that other variants are also valid.  Breaking things into return and risk is pretty clean, so I use this framework for such purposes.  This does not mean that this is the only framework.  For example, you can argue that an edge is anything that improves risk adjusted return or utility or liability mismatch.  These combine notions of return and risk.  However, given this chain of conversations related to asking whether stops make money in and of themselves, the cleanest framework seemed to be return and risk separately.

Stops do not make money.  An edge that creates genuine positive expectancy is the only thing which generates returns on average, through time.  Stops do not make money on average through time and reduce your expected profit if you have positive expectancy.  In trying to explain this, it is important to separate what makes money and what does not.  Edge makes money on average, through time.  You will see evidence of belief that stops create expected returns throughout the threads in and of themselves.  It cannot.

Risk management is important.  I am not doing away with it at all.  However, risk management does not make money.  It determines magnitude of risk and can alter the shape of your outcomes.  You can reshape the distribution via stops (let's not get into mispriced options) to change hit rate, for example.  Placing trailing stops will increase hit rate. But it will change the reward profile to offset it in a way that will not change the central expectation.  To suggest otherwise is to move into alchemy.

You are almost never sure of what your edge is.  Position sizing should reflect your uncertainty.  That is different to saying position sizing makes you money.  It helps produce a superior risk adjusted outcome.

All this pedantry is required here just to divide the role of stops into risk management and/or return generation.  It sits squarely in risk management.  It has a valuable role to play in regard.  I use stops, for example.

I should add, an edge tends to be defined in contexts related to alpha and (sub) zero-sum situations.


----------



## DeepState

*Re: Stop Loss is not always your friend....*



KnowThePast said:


> Then it dawned on me - I was assuming that a 5% stop loss would execute at a price exactly 5% (rounded to nearest $0.01) below purchase price, which is not going to be the case. So, I've put in 5% slippage, each 5% stop loss would actually execute at 10%, 10% at 15%, etc. This brought the result down, but still it is substantially above the benchmark:
> 
> 
> 
> I tried a High PE strategy, that underperforms the benchmark. I'll spare everyone looking at another graph - the result, again, was that stop losses improved the performance of even an underperforming strategy.
> 
> This analysis stands at complete odds with RY's statement that stop losses do not improve the expected return and are simply a risk management mechanism, which is likely to bring down returns, not improve them. When my analysis disagrees with RY, my default stance is that I made a mistake. What did I miss?
> 
> RY, how was your data backtested? I ask, because I know standard backtests that re-balance yearly may not be very suitable for testing stop losses.
> 
> I ran a P/B strategy for the last 6 months, with a 5% stop loss and 5% slippage. That beat the same strategy without stop loss by a whopping 16.13%. Attached is a spreadsheet with all the trades, in case anyone is kind enough to look at it and spot an error.
> 
> View attachment 60698




....

The result comes out of options theory.  It's fairly straight forward. Given your quant skills and for those inclined to stochastic thinking, here's the argument in a highly simplified framework that actually goes to the binomial lattice methods for options pricing.


You have a fair coin (ie. no forecasting power). 
We flip this coin 10 times. Heads, tails are the only outcomes.
Picture a set of expanding branches. Time 0 is the start.  If you flip heads, you move to node H.  T otherwise.  Flip again, now you have nodes (HH, HT/TH,TT) and so on.
The values ascribed to H = +1 and T=-1.  Profit is simply the sum.
Do this a gazillion times and at t=10 you will have a normal distribution with mean at zero and standard deviation sqrt (10).
If you load the coin and give it a 2% greater chance of throwing heads to represent the presence of forecasting power, your distribution at t-10 shifts.  The standard deviation hardly moves.  That's edge.
You can insert stops at any of the nodes you want.  Say you want to stop on touch of -5.  Anything pathway that hits this figure sees you leave the simulation for that round at -5.
Do that a gazillion times and you will find your distribution skews to the positive, but your expected outcome drops if you have an edge, or does not move if you don't.




That's it.  Any single pathway through this garden of forking paths can do whatever it wants. This includes completely defying expectations.  If you run the simulations, you will see that there is a reasonable chance of that happening for nearly everything you might reasonably try.  What matters for this discussion is whether stops change your return expectations for the better.  

As I have said previously:

They improve your expectations if you have negative edge by taking you out of the game; 
They do nothing if you are random; and
They reduce expectations if you have edge.



I am not able to replicate your figures.  However, the approach you have adopted has strong and likely unintentional bias built in.  You seem to be comparing the performance of a portfolio which is an equally weighted one along some measure.  You then select a portion in which those which have performed poorly enough along the journey to warrant being stopped out against it.  These are removed.  What is left is a censored sample which removes all the 'bad' stocks ex-post.  Unsurprisingly this generally does a lot better than the uncensored sample.  This methodology is unsuitable for the stated purpose of assessing whether stops add value or not on an expectations basis.


----------



## tech/a

*Re: Stop Loss is not always your friend....*

Excellent posts Craft Know the Future and R/Y.

Some Weekend reading.


----------



## craft

*Re: Stop Loss is not always your friend....*



DeepState said:


> Stops do not make money.  An edge that creates genuine positive expectancy is the only thing which generates returns on average, through time.  Stops do not make money on average through time and reduce your expected profit if you have positive expectancy.  In trying to explain this, it is important to separate what makes money and what does not.  Edge makes money on average, through time.  You will see evidence of belief that stops create expected returns throughout the threads in and of themselves.  It cannot.
> 
> Risk management is important.  I am not doing away with it at all.  However, risk management does not make money.  It determines magnitude of risk and can alter the shape of your outcomes.  You can reshape the distribution via stops (let's not get into mispriced options) to change hit rate, for example.  Placing trailing stops will increase hit rate. But it will change the reward profile to offset it in a way that will not change the central expectation.  To suggest otherwise is to move into alchemy.
> 
> All this pedantry is required here just to divide the role of stops into risk management and/or return generation.  It sits squarely in risk management.  It has a valuable role to play in regard.  I use stops, for example.




RY I understand where you are coming from.

But some positive expectancies are only in existence with a defined price based exit. The stop is required for the positive expectancy to even exist. The stop in this case cannot be considered only in the risk management realm. 

To differentiate between what you are saying and where some of the Techs are coming from you need to be able to define the cause of your edge.

It doesn't help in reconciling this discussion that many historical edges identified by only positive expectancy are mined from random distribution skews of no real edge at all and people don't understand that - which is why I am asking what people think the cause of their edge is. Does the cause of your edge require an exit? 

Or are we defining stops narrowly here as only arbitrary risk management exits isolated from the edge itself, in which case as you say they can’t be anything but be an expense over the long haul.


----------



## DeepState

*Re: Stop Loss is not always your friend....*



craft said:


> RY I understand where you are coming from.
> 
> But some positive expectancies are only in existence with a defined price based exit. The stop is required for the positive expectancy to even exist. The stop in this case cannot be considered only in the risk management realm.
> 
> To differentiate between what you are saying and where some of the Techs are coming from you need to be able to define the cause of your edge.
> 
> It doesn't help in reconciling this discussion that many historical edges identified by only positive expectancy are mined from random distribution skews of no real edge at all and people don't understand that - which is why I am asking what people think the cause of their edge is. Does the cause of your edge require an exit?
> 
> Or are we defining stops narrowly here as only arbitrary risk management exits isolated from the edge itself, in which case as you say they can’t be anything but be an expense over the long haul.




Yep, we're really on the same page and the rest of this is semantics which you can file as you please.

In the risk/reward dichotomy world, if your stop is directionally informed then I regard it as part of edge.  Here's the reason.  Let's say you use momentum as your source of edge.  Let's say it has positive edge.  You can reasonably argue that your momentum signal switches off on exhaustion and know that at a certain price, the signal has no value.  You can then place a stop at that point which looks a lot like a trailing stop. 

If you are good, is that stop a risk management tool?  Or did you know that your insight/edge/yadda shuts down at that point?  That was a specific level.  It as set with insight.  You can regard it as an initiation of a new signal at that point.  So it is a stop loss or a take profit or an initiation?  Essentially, it is an implementation of an idea with trades accordingly.  For example, stronger momentum tends to lead to a stronger signal.  Hence you can buy further into the direction.  These are stop-initiations.  Hardly risk management.  Yet they are stops.  You are describing the mirror.

If you had no idea and were just using static, none of these ideas would bring expected value to the table.

So, if your stops are directionally informed (as per momentum which is price dependent), I contend that the idea is what creates returns and that's just how you implement them.  What is common to all of this is that these stops are of no value if there is no predictive power...which is really all I'm saying here.  If you have predictive power over the very long term (like buy-hold style), stops will subtract value.  If your insight moves positively with the price (momentum), is it a stop when the signal switches off?  Given it is the actual signal that tells you when to switch off, I contend that it isn't the same kind of stop as a stop loss.  It's just varying position sizes according to signal strength.

Holy cow, Craft.  This is getting really pedantic.  I think we both know what we mean in a way which is relevant to us.  I think we really are on the same page behind all of this.


----------



## craft

*Re: Stop Loss is not always your friend....*



KnowThePast said:


> I ran a P/B strategy for the last 6 months, with a 5% stop loss and 5% slippage. That beat the same strategy without stop loss by a whopping 16.13%. Attached is a spreadsheet with all the trades, in case anyone is kind enough to look at it and spot an error.
> 
> View attachment 60698




Take your largest negative and positive outlier out and then consider both sets of results in light of RY’s post 863. 

Also you are introducing a time frame outcome to your system   I.e.  the exit is no longer just PB>2 or de-listed  but the lesser of market price in 6 months or PB>2 for the non stoped system. Introducing this time frame constraint means identifying current momentum is probably going to help and it could be argued the stop does that as the price either has to get on with it or you move on to the next candidate. 

The real question is if you let the PB>2 or delisted exit criteria run its full and natural course until everything was exited  what would the ultimate return (compound annual return) of that system be compared to running the system with the stop over the same period.


----------



## craft

*Re: Stop Loss is not always your friend....*



DeepState said:


> Yep, we're really on the same page and the rest of this is semantics which you can file as you please.




Yep on the same page.

I think if we distinguish between directionally motivated exits from arbitrary exits everybody is on the same page.


That was the point of my posts. Oh and to find out what people think is the 'cause' of the edge they utilise. Any takers?


----------



## skyQuake

*Re: Stop Loss is not always your friend....*



KnowThePast said:


> Then it dawned on me - I was assuming that a 5% stop loss would execute at a price exactly 5% (rounded to nearest $0.01) below purchase price, which is not going to be the case. So, I've put in 5% slippage, each 5% stop loss would actually execute at 10%, 10% at 15%, etc. This brought the result down, but still it is substantially above the benchmark:
> 
> View attachment 60697
> 
> 
> I tried a High PE strategy, that underperforms the benchmark. I'll spare everyone looking at another graph - the result, again, was that stop losses improved the performance of even an underperforming strategy.
> 
> This analysis stands at complete odds with RY's statement that stop losses do not improve the expected return and are simply a risk management mechanism, which is likely to bring down returns, not improve them. When my analysis disagrees with RY, my default stance is that I made a mistake. What did I miss?
> 
> RY, how was your data backtested? I ask, because I know standard backtests that re-balance yearly may not be very suitable for testing stop losses.
> 
> I ran a P/B strategy for the last 6 months, with a 5% stop loss and 5% slippage. That beat the same strategy without stop loss by a whopping 16.13%. Attached is a spreadsheet with all the trades, in case anyone is kind enough to look at it and spot an error.
> 
> View attachment 60698




I think you expanded your stock universe too much. Its including some micro caps that 
a) do no volume
b) have incorrect book value

See attached. I've computed avg daily vol in the past 6m, and then taken each position to be the max of (arbitary) $20k or 30% avg daily val, then adjusted each return accordingly. 

The avg return is actually very close to 0 (still outperformed the index though)

Eg RDG is your outlier winner. However have a look at the market depth today! Not something you can really take a swing at.

View attachment stoplossTrades_adj.xlsx


----------



## tech/a

*Re: Stop Loss is not always your friend....*



> Once stopped, share will not be bought again the next 365 days.




Why this condition?

Your edge has nothing that indicates momentum in the direction of a positive trade.
Only a statistic.

 Net Assets. We buy when P/B < 0.7, we sell when P/B > 2. Is this a proven or hypothetical edge?

Says nothing about its strength in the market NOW.
Does the method buy the stock back in 12 mths regardless of whether it is of less or more value to 12 mths ago.

A simply buy when it rises 10% above todays price should help.

Point is there are so many variables its next to meaningless.



> Any takers?




Momentum/Sentiment. That at least gets you on and can be valuable when getting you out---a swing the other way----with momentum.


----------



## artist

*Re: Stop Loss is not always your friend....*



DeepState said:


> ....
> 
> The result comes out of options theory. . . . . here's the argument in a highly simplified framework that actually goes to the binomial lattice methods for options pricing.
> 
> . . . .
> 
> That's it.  Any single pathway through this garden of forking paths can do whatever it wants. This includes completely defying expectations.  If you run the simulations, you will see that there is a reasonable chance of that happening for nearly everything you might reasonably try.  What matters for this discussion is whether stops change your return expectations for the better.
> .





In this context of using stop losses to protect against unacceptable, unexpected (large) moves in the SP, isn't the appropriate distribution the Poisson Distribution rather than the Binomial ?


"The Black-Scholes Model
l
The binomial model is a discrete-time model for asset price
movements, with a time interval (t) between price movements.
l
As the time interval is shortened, the limiting distribution, as t -> 0,
can take one of two forms.
–
If as t -> 0, price changes become smaller, the limiting distribution is the
normal distribution and the price process is a continuous one.
–
If as t->0, price changes remain large, the limiting distribution is the
poisson distribution, i.e., a distribution that allows for price jumps.
l
The Black-Scholes model applies when the limiting distribution is the
normal distribution , and explicitly assumes that the price process is
continuous and that there are no jumps in asset prices." (http://people.stern.nyu.edu/adamodar/pdfiles/option.pdf on Page 12)


and 

"The Poisson distribution can be applied to systems with a large number of possible events, each of which is rare. How many such events will occur during a fixed time interval? Under the right circumstances, this is a random number with a Poisson distribution.

. . .

Applications of the Poisson distribution can be found in many fields related to counting:

. . .

The number of jumps in a stock price in a given time interval.

. . . "   (http://en.wikipedia.org/wiki/Poisson_distribution)


----------



## DeepState

*Re: Stop Loss is not always your friend....*



artist said:


> In this context of using stop losses to protect against unacceptable, unexpected (large) moves in the SP, isn't the appropriate distribution the Poisson Distribution rather than the Binomial ?
> 
> 
> "The Black-Scholes Model
> l
> The binomial model is a discrete-time model for asset price
> movements, with a time interval (t) between price movements.
> l
> As the time interval is shortened, the limiting distribution, as t -> 0,
> can take one of two forms.
> –
> If as t -> 0, price changes become smaller, the limiting distribution is the
> normal distribution and the price process is a continuous one.
> –
> If as t->0, price changes remain large, the limiting distribution is the
> poisson distribution, i.e., a distribution that allows for price jumps.
> l
> The Black-Scholes model applies when the limiting distribution is the
> normal distribution , and explicitly assumes that the price process is
> continuous and that there are no jumps in asset prices." (http://people.stern.nyu.edu/adamodar/pdfiles/option.pdf on Page 12)
> 
> 
> and
> 
> "The Poisson distribution can be applied to systems with a large number of possible events, each of which is rare. How many such events will occur during a fixed time interval? Under the right circumstances, this is a random number with a Poisson distribution.
> 
> . . .
> 
> Applications of the Poisson distribution can be found in many fields related to counting:
> 
> . . .
> 
> The number of jumps in a stock price in a given time interval.
> 
> . . . "   (http://en.wikipedia.org/wiki/Poisson_distribution)




Black Scholes assumes log-normal distribution of returns.  This lattice is modeling along those lines. The lattice approach was invented by Merton and the approach produces returns that asymptote to the Black Scholes formulation.  Binomial converges to normal at the asymptote.  It's bloody amazing that central limit stuff.  Poisson can be suitable where you do not know the variance.  In this case you do.


----------



## artist

*Re: Stop Loss is not always your friend....*



DeepState said:


> Black Scholes assumes log-normal distribution of returns.  This lattice is modeling along those lines. The lattice approach was invented by Merton and the approach produces returns that asymptote to the Black Scholes formulation.  Binomial converges to normal at the asymptote.  It's bloody amazing that central limit stuff.  Poisson can be suitable where you do not know the variance.  In this case you do.




I don't want to delve too far into option pricing models in this thread. But obviously volatility is the issue that gives rise to market participants trying to devise stop-loss strategies, yet not get stopped out so often that the practice becomes a source of loss instead in its own right.

With regard to B-S / Binomial / Normal / Lognormal, one of my finance textbooks has this to say; "[A]s the number of subintervals (or nodes in the lattice in your terminology) increases, the number of possible stock prices also increase. . . . . [and] the graph approaches the appearance of the familiar bell-shaped curve. In fact, as the number of intervals increases . . . the frequency distribution progressively approaches the lognormal distribution rather than the normal distribution." 

That is all well and good, but there is a footnote attached to the last sentence. "Actually, more complex considerations enter here. The limit of this process is lognormal only if we assume also that stock prices move continuously, by which we mean that over small time intervals only small price movements can occur. This rules out rare events such as sudden,extreme price moves in response to dramatic information (like a takeover attempt)."

Moreover, the same textbook lists three "important assumptions underlying the [Black-Scholes] formula". The third of the three they list is "Stock prices are continuous, meaning that sudden extreme jumps such as those in the aftermath of an announcement of a takeover attempt are ruled out."

That is, the models rule out of consideration precisely the fluctuations that this thread is discussing.

You state that "In this case you do (know the variance)". But you only know the historical variance over an arbitrarily selected period of time. Choose a different data interval and you will get a different historical variance figure. There are different ways to try to model forward volatility estimates (e.g. (G)ARCH http://en.wikipedia.org/wiki/Autoregressive_conditional_heteroskedasticity) but no method of assessing historical, or estimating future volatility can give you confidence that a sudden short-term change in price (spike or otherwise) will not adversely affect your position.

So a long-term investor may well be able to ride out a short-term volatility spike. So might a day-trader. It will depend on the usual things such as risk-tolerance, money management etc. The usual. Including, perhaps, the use of a stop-loss.


----------



## DeepState

*Re: Stop Loss is not always your friend....*



artist said:


> I don't want to delve too far into option pricing models in this thread. But obviously volatility is the issue that gives rise to market participants trying to devise stop-loss strategies, yet not get stopped out so often that the practice becomes a source of loss instead in its own right.
> 
> With regard to B-S / Binomial / Normal / Lognormal, one of my finance textbooks has this to say; "[A]s the number of subintervals (or nodes in the lattice in your terminology) increases, the number of possible stock prices also increase. . . . . [and] the graph approaches the appearance of the familiar bell-shaped curve. In fact, as the number of intervals increases . . . the frequency distribution progressively approaches the lognormal distribution rather than the normal distribution."
> 
> That is all well and good, but there is a footnote attached to the last sentence. "Actually, more complex considerations enter here. The limit of this process is lognormal only if we assume also that stock prices move continuously, by which we mean that over small time intervals only small price movements can occur. This rules out rare events such as sudden,extreme price moves in response to dramatic information (like a takeover attempt)."
> 
> Moreover, the same textbook lists three "important assumptions underlying the [Black-Scholes] formula". The third of the three they list is "Stock prices are continuous, meaning that sudden extreme jumps such as those in the aftermath of an announcement of a takeover attempt are ruled out."
> 
> That is, the models rule out of consideration precisely the fluctuations that this thread is discussing.
> 
> You state that "In this case you do (know the variance)". But you only know the historical variance over an arbitrarily selected period of time. Choose a different data interval and you will get a different historical variance figure. There are different ways to try to model forward volatility estimates (e.g. (G)ARCH http://en.wikipedia.org/wiki/Autoregressive_conditional_heteroskedasticity) but no method of assessing historical, or estimating future volatility can give you confidence that a sudden short-term change in price (spike or otherwise) will not adversely affect your position.
> 
> So a long-term investor may well be able to ride out a short-term volatility spike. So might a day-trader. It will depend on the usual things such as risk-tolerance, money management etc. The usual. Including, perhaps, the use of a stop-loss.




The above relates to the discussion on options pricing assumptions.  The assumption of log normality and continuous markets is violated in reality and the actual pricing of options reflects this (via skews in the implied volatilities through time and across time).  Nonetheless, without any directional prediction ability, the placement of stops even in that environment or any other arbitrary distribution whose expected return is zero and will not see expectations shift through the use of stops alone.  If it did, it would be the result of a coding error.

The lattice allows for the fact that stocks trade in a non-continuous way. Stocks trade by the tick, for example.  You can also vary heaps of things including distribution standard deviation, skew, kurtosis and higher moments, E/F/I/etc.-GARCH / Regime shift, jump models, pairs can include copula, resample in any way, distort these via generation functions etc..probabilities through each node path etc.. Anything which moves can be modeled including take-overs and extinctions. Anything that you have raised is easily captured.  And then some. The coin flip at +1/-1 is clearly the most basic of basic, but it is sufficient for the purpose. Adding infinite model features doesn't change the outcome.  This is just a model to do a brute force simulation on what is a tautology that actually doesn't need simulation to prove it exists.  

Alpha is zero sum prior to costs.  Given it is zero sum, someone with no insight can't suddenly generate returns by whacking down stops. A second person will eventually meet them on a forum and then whack down stops too.  They'll all do it and then suddenly everyone with no idea what is going on is making money in a sub-zero sum game.  Suddenly the most reliable thing to do is to have no idea but whack down stops. More stops the better. That's alchemy.  Stops do not create returns in and of themselves on average through time.

We are talking about expected returns and stop losses. We are using a framework lifted from the options world because it is suitable.  Adding stops will simply alter the distribution outcomes.  It may make you feel safer, keep you in the game longer perhaps, but not ultimately increase your expected return if you have no edge.  I have already covered off what happens if you do have a positive or negative edge.  These continue to apply in this generalized environment which captures everything that a market can do.

Feel free to model something and confirm the result. Any distributions assumptions are fine but the expected return must be zero.  Add stops as you please as long as they are not directionally informed.  That's the only two conditions.  Zero mean distribution, stops not directionally informed.  ...then see what happens.  It's already pre-determined. There will be no move in expected outcome although the distribution will shift in some way depending on your other assumptions - which, whilst interesting and valid, don't matter for the outcome on the question of whether stops add value in and of themselves on average through time.

Once again, that is not to say stops do not have value as risk management tools.  But, that's risk management.


----------



## tech/a

*Re: Stop Loss is not always your friend....*

Too much pontification


----------



## DeepState

*Re: Stop Loss is not always your friend....*



tech/a said:


> Too much pontification




Tends to happen when tautologies are not recognised as such and when things that aren't are thought to be so.  A tautology requires no pontification.  It just is. 

I guess we agree.  Apparently a stop loss is not always your friend.


----------



## KnowThePast

*Re: Stop Loss is not always your friend....*



DeepState said:


> ....
> 
> The result comes out of options theory.  It's fairly straight forward. Given your quant skills and for those inclined to stochastic thinking, here's the argument in a highly simplified framework that actually goes to the binomial lattice methods for options pricing.
> 
> 
> You have a fair coin (ie. no forecasting power).
> We flip this coin 10 times. Heads, tails are the only outcomes.
> Picture a set of expanding branches. Time 0 is the start.  If you flip heads, you move to node H.  T otherwise.  Flip again, now you have nodes (HH, HT/TH,TT) and so on.
> The values ascribed to H = +1 and T=-1.  Profit is simply the sum.
> Do this a gazillion times and at t=10 you will have a normal distribution with mean at zero and standard deviation sqrt (10).
> If you load the coin and give it a 2% greater chance of throwing heads to represent the presence of forecasting power, your distribution at t-10 shifts.  The standard deviation hardly moves.  That's edge.
> You can insert stops at any of the nodes you want.  Say you want to stop on touch of -5.  Anything pathway that hits this figure sees you leave the simulation for that round at -5.
> Do that a gazillion times and you will find your distribution skews to the positive, but your expected outcome drops if you have an edge, or does not move if you don't.
> 
> View attachment 60699
> 
> 
> That's it.  Any single pathway through this garden of forking paths can do whatever it wants. This includes completely defying expectations.  If you run the simulations, you will see that there is a reasonable chance of that happening for nearly everything you might reasonably try.  What matters for this discussion is whether stops change your return expectations for the better.




Doesn't that assume each step to have an equal probability of happening? Whilst these are all possilities, will real world behave like that?



DeepState said:


> I am not able to replicate your figures.




Just to confirm, you ran the same backtest? (if so, a code bug in my procedure is more likely.)

My universe is not entire XAO, so that could be a reason for the difference as well.



DeepState said:


> However, the approach you have adopted has strong and likely unintentional bias built in.  You seem to be comparing the performance of a portfolio which is an equally weighted one along some measure.  You then select a portion in which those which have performed poorly enough along the journey to warrant being stopped out against it.  These are removed.  What is left is a censored sample which removes all the 'bad' stocks ex-post.  Unsurprisingly this generally does a lot better than the uncensored sample.  This methodology is unsuitable for the stated purpose of assessing whether stops add value or not on an expectations basis.




I am not sure I follow. The universe was the same for all tests, stop loss runs and benchmarks runs were identical, other than the stop loss. Yes, it is not a suitable methodology to test every possibility, but that wasn't the aim - I just wanted to see what has actually happened over the last 5 years.



craft said:


> Take your largest negative and positive outlier out and then consider both sets of results in light of RY’s post 863.
> 
> Also you are introducing a time frame outcome to your system   I.e.  the exit is no longer just PB>2 or de-listed  but the lesser of market price in 6 months or PB>2 for the non stoped system. Introducing this time frame constraint means identifying current momentum is probably going to help and it could be argued the stop does that as the price either has to get on with it or you move on to the next candidate.
> 
> The real question is if you let the PB>2 or delisted exit criteria run its full and natural course until everything was exited  what would the ultimate return (compound annual return) of that system be compared to running the system with the stop over the same period.




Hi craft,

But that's exactly what I did, I think 

My "no stop loss" run is the PB>2 exit critera allowed to run its course.
I then re-ran it with various stop losses, and these all showed an improved result over the "no stop loss" run.

Regarding the outliers, these are also present in "no stop loss" benchmark, so they do not explain the outperformance.



craft said:


> That was the point of my posts. Oh and to find out what people think is the 'cause' of the edge they utilise. Any takers?




I'll bite - size, liquidity and psychology. Not necessarily in that order.



skyQuake said:


> I think you expanded your stock universe too much. Its including some micro caps that
> a) do no volume
> b) have incorrect book value
> 
> See attached. I've computed avg daily vol in the past 6m, and then taken each position to be the max of (arbitary) $20k or 30% avg daily val, then adjusted each return accordingly.
> 
> The avg return is actually very close to 0 (still outperformed the index though)
> 
> Eg RDG is your outlier winner. However have a look at the market depth today! Not something you can really take a swing at.
> 
> View attachment 60703




Thanks skyQuake!

These are all valid points. But, all these are present in the "no stops" benchmark as well. So outperformance is not explained by these. 

I re-ran the tests, this time only including stocks with market cap over $500m, which should all have enough liquidity. Same result.



tech/a said:


> Why this condition?
> 
> Your edge has nothing that indicates momentum in the direction of a positive trade.
> Only a statistic.
> 
> Net Assets. We buy when P/B < 0.7, we sell when P/B > 2. Is this a proven or hypothetical edge?




Proven. Low P/B strategies have been shown to consistently outperform the market.

The condition of 365 days is to stop the stock from been bought immediately after getting stopped out (as it would still meet the buy criteria). I didn't want to put more criteria in, as I was trying to just test the effect of stop losses. Playing around with duration or other criteria, including momentum, could certainly improve the results.



tech/a said:


> Says nothing about its strength in the market NOW.
> Does the method buy the stock back in 12 mths regardless of whether it is of less or more value to 12 mths ago.
> 
> A simply buy when it rises 10% above todays price should help.
> 
> Point is there are so many variables its next to meaningless.




Buys back regardless. I didn't mean it as a good strategy, just a suitable example to check how stop losses would have effected it over the last 5 years. 



DeepState said:


> Alpha is zero sum prior to costs. Given it is zero sum, someone with no insight can't suddenly generate returns by whacking down stops. A second person will eventually meet them on a forum and then whack down stops too. *They'll all do it* and then suddenly everyone with no idea what is going on is making money in a sub-zero sum game. Suddenly the most reliable thing to do is to have no idea but whack down stops. More stops the better. That's alchemy. Stops do not create returns in and of themselves on average through time.




First of all - I fully agree with you. This is alchemy, so please don't take it that I am disagreeing with you, I am trying to make it go away in my data 

Why is it that Low PE/PB strategies have outperformed for such a long time? Yes, their effectiveness has diminished, but not zeroed out as one would expect, as everyone joins the party? Size and liquidity issues more likely for these stocks, perhaps?

I now ran more backtests on more strategies. I also googled many studies on this. The results are mixed, but certain trends can be "mined".

- Performance tends to be improved when using static (EMH), or simple mean reversion strategies (fundamental).
- The strategies that significantly outperform the benchmark are not helped by stop losses.
- The larger the outperformance, the more stop losses take away from it.
- strategies with large underperformance have been helped by stop losses.
- strategies with relatively small over/under performance, even if consistent, have mixed results.

So, now that I've done more runs, the results seem to be exactly what you were suggesting:
- stop losses worsen returns for highly profitable strategies (edge?)
- stop losses improve returns for bad strategies
- results in the middle are highly mixed.

All that work to find out that I should have just listened to you. You've mentioned before that 95% of the signals you find turn out to be just noise - this has been exactly my experience. Add one to the list.

Getting on to risk - do stop losses reduce risk in a highly diversified portfolio? I would expect that they change the shape of losses, but not the final outcome.


----------



## luutzu

*Re: Stop Loss is not always your friend....*

All these reminds me of a story I heard somewhere. It goes something like this:

Two country Gentlemen at a bar were having philosophical debates and somehow it got to them debating how many teeth does a horse in the barn outside have.

One said that horses are of that genus, related to this and that; and this and that have this many teeth... horses being bigger and eat grass and at certain age it have this many teeth; 

The other argued that it depends on the origin of the horse in question... Arabian horses would have this many teeth, factor in the climate and this and that, it would have this many teeth at this and that age, depends on age and birth and health blah blah.

They debated back and forth, back and forth into the early hours... still keep going until a lowly, uneducated bartender told them...

The barn's unlocked, why don't you guys just go out there and open the horse's mouth and start counting.



---------

With investing, you don't have a lowly, uneducated bartender telling you... you got at least two self-made multi-billionaire investors telling you to go and open the horse's mouth and start counting. But somehow real, smart, investing just doesn't work like that.


----------



## KnowThePast

*Re: Stop Loss is not always your friend....*



luutzu said:


> All these reminds me of a story I heard somewhere. It goes something like this:
> 
> Two country Gentlemen at a bar were having philosophical debates and somehow it got to them debating how many teeth does a horse in the barn outside have.
> 
> One said that horses are of that genus, related to this and that; and this and that have this many teeth... horses being bigger and eat grass and at certain age it have this many teeth;
> 
> The other argued that it depends on the origin of the horse in question... Arabian horses would have this many teeth, factor in the climate and this and that, it would have this many teeth at this and that age, depends on age and birth and health blah blah.
> 
> They debated back and forth, back and forth into the early hours... still keep going until a lowly, uneducated bartender told them...
> 
> The barn's unlocked, why don't you guys just go out there and open the horse's mouth and start counting.
> 
> 
> 
> ---------
> 
> With investing, you don't have a lowly, uneducated bartender telling you... you got at least two self-made multi-billionaire investors telling you to go and open the horse's mouth and start counting. But somehow real, smart, investing just doesn't work like that.




What you are missing is how much fun these two guys had. And that one horse could have been an outlier, the results from it don't count 

On a serious note, luutzu, a lot of you posts come across as advocating ignorance as a strategy. While many things are unnecessarily complicated, it doesn't make *all* that is complicated wrong.


----------



## luutzu

*Re: Stop Loss is not always your friend....*



KnowThePast said:


> What you are missing is how much fun these two guys had. And that one horse could have been an outlier, the results from it don't count
> 
> On a serious note, luutzu, a lot of you posts come across as advocating ignorance as a strategy. While many things are unnecessarily complicated, it doesn't make *all* that is complicated wrong.




No, not ignorance. In-depth knowledge. I'm not a random walk guy. 


Anyway, I just enjoy studying businesses...


----------



## DeepState

*Re: Stop Loss is not always your friend....*



luutzu said:


> All these reminds me of a story I heard somewhere. It goes something like this:
> 
> Two country Gentlemen at a bar were having philosophical debates and somehow it got to them debating how many teeth does a horse in the barn outside have.
> 
> One said that horses are of that genus, related to this and that; and this and that have this many teeth... horses being bigger and eat grass and at certain age it have this many teeth;
> 
> The other argued that it depends on the origin of the horse in question... Arabian horses would have this many teeth, factor in the climate and this and that, it would have this many teeth at this and that age, depends on age and birth and health blah blah.
> 
> They debated back and forth, back and forth into the early hours... still keep going until a lowly, uneducated bartender told them...
> 
> The barn's unlocked, why don't you guys just go out there and open the horse's mouth and start counting.
> 
> 
> 
> ---------
> 
> With investing, you don't have a lowly, uneducated bartender telling you... you got at least two self-made multi-billionaire investors telling you to go and open the horse's mouth and start counting. But somehow real, smart, investing just doesn't work like that.




Please count how many teeth there are on this horse and let us know what the answer is oh worldly one.




Hint: The answer might be on YouTube.


----------



## KnowThePast

*Re: Stop Loss is not always your friend....*



DeepState said:


> Please count how many teeth there are on this horse and let us know what the answer is oh worldly one.
> 
> View attachment 60708
> 
> 
> Hint: The answer might be on YouTube.




One of the few times I actually laughed out loud. Very subtle.


----------



## luutzu

*Re: Stop Loss is not always your friend....*



DeepState said:


> Please count how many teeth there are on this horse and let us know what the answer is oh worldly one.
> 
> View attachment 60708
> 
> 
> Hint: The answer might be on YouTube.




See, when you talk too much nonsense you will not be able to know head from tail.


----------



## DeepState

*Re: Stop Loss is not always your friend....*

KTP

Can you please resubmit the result for the last six months per the attached spreadsheet with internal working so I can understand how you came upon the numbers you have mentioned for the most recent period.  I'm not sure how I get from that spreadsheet to the figures you mentioned.  It would be good to get aligned with you.

On the binomial tree, it is the simplest toy possible, but it has all the features needed to make this point.  However, should you wish a fuller explanation, please refer to the exchange that I had with Artist.  Both of you have raised the same, perfectly reasonable, issue. Bottom line, no matter what the distributional properties you select, as long as the average outcome is zero (representing no insight on directional prediction) and the stops are not directionally informed, you can whack stops anywhere you like.  It will not change the expected return outcome.  It will change the distribution shape.

If you start with the simple binomial tree, the point should become evident.  No movement of stops changes expected outcome.  No additional complexity will change the outcome.


----------



## DeepState

*Re: Stop Loss is not always your friend....*



KnowThePast said:


> Getting on to risk - do stop losses reduce risk in a highly diversified portfolio? I would expect that they change the shape of losses, but not the final outcome.




If you are talking about individual stock stop losses then a portfolio of these will be affected.

Here's one way of thinking about it.

We are in a fake world where each stock performs independently.  Each stock has a normal distribution.  There are ten equally weighted stocks.  The portfolio will have a normal distribution.  

Now, change the stock distributions to something positively skewed.  Anything.  That is what happens when a stop loss is in place.  The same equally weighted portfolio will have a positive skew, though less so than the skew for each individual stock because of diversification effects.

If the stocks become more correlated, the skew of the portfolio increases.

If one of the stocks is massively volatile relative to the rest, the skew of that will dominate and result in a skewed portfolio outcome which is greater than the previous scenarios.

No matter what the correlation is other than it being less than 1, the more stocks you have, the more evenly their risks are distributed, the more normal the portfolio looks whatever the degree of skew you put in place at the individual stock level.  In that situation, if the overall portfolio matters most, it is better to hedge this with an option like payoff over the whole portfolio.


----------



## KnowThePast

*Re: Stop Loss is not always your friend....*



DeepState said:


> KTP
> 
> Can you please resubmit the result for the last six months per the attached spreadsheet with internal working so I can understand how you came upon the numbers you have mentioned for the most recent period.  I'm not sure how I get from that spreadsheet to the figures you mentioned.  It would be good to get aligned with you.
> 
> On the binomial tree, it is the simplest toy possible, but it has all the features needed to make this point.  However, should you wish a fuller explanation, please refer to the exchange that I had with Artist.  Both of you have raised the same, perfectly reasonable, issue. Bottom line, no matter what the distributional properties you select, as long as the average outcome is zero (representing no insight on directional prediction) and the stops are not directionally informed, you can whack stops anywhere you like.  It will not change the expected return outcome.  It will change the distribution shape.
> 
> If you start with the simple binomial tree, the point should become evident.  No movement of stops changes expected outcome.  No additional complexity will change the outcome.




Thanks RY.

The point I was trying to make is that market can be irrational for prolonged, perhaps indefinite periods of time. In case of low PE/PB, it seems to persist despite he model saying that it cannot (consistently). Reasons for it can be argued, but data is too consistent for too long to dismiss it.

Could the same be the case with stop loss strategies? Apparently not.

There are two ways to find statistical edges. One is to start with theory, then check the data. Or, find the data, then find a matching theory. Unless data is overwhelmingly consistent, you are never going to know for sure.

The spreadsheet should have everything to reconcile the figures:
- Start point is 11/06/2014, cash of $1,000,000
- Suitable candidates are bought on day 1.
- 1 month per step. Daily would be more accurate, as it will miss stop losses on stocks that have gone below  trigger point, than got back up. For the record, I did try it on a daily step, result was about the same.
- Each step, universe is sorted by P/B, lowest to highest.
- Sum of all trades is the overall profit.

I've added worksheets for the run without stop losses, and the universe used. Attached. Thank you very much for taking a look.

View attachment stoplossTrades.xlsx


----------



## KnowThePast

*Re: Stop Loss is not always your friend....*



DeepState said:


> If you are talking about individual stock stop losses then a portfolio of these will be affected.
> 
> Here's one way of thinking about it.
> 
> We are in a fake world where each stock performs independently.  Each stock has a normal distribution.  There are ten equally weighted stocks.  The portfolio will have a normal distribution.
> 
> Now, change the stock distributions to something positively skewed.  Anything.  That is what happens when a stop loss is in place.  The same equally weighted portfolio will have a positive skew, though less so than the skew for each individual stock because of diversification effects.
> 
> If the stocks become more correlated, the skew of the portfolio increases.
> 
> If one of the stocks is massively volatile relative to the rest, the skew of that will dominate and result in a skewed portfolio outcome which is greater than the previous scenarios.
> 
> No matter what the correlation is other than it being less than 1, the more stocks you have, the more evenly their risks are distributed, the more normal the portfolio looks whatever the degree of skew you put in place at the individual stock level.  In that situation, if the overall portfolio matters most, it is better to hedge this with an option like payoff over the whole portfolio.




Hmm, I think we talked before about Mandelbrot and his criticism of using bell curves for share prices distribution.

What if stop less help to increase or reduce the number of instances of fat tails and outliers?


----------



## craft

*Re: Stop Loss is not always your friend....*



KnowThePast said:


> What if stop less help to increase or reduce the number of instances of fat tails and outliers?





That’s exactly what you will do (but maybe in the reverse of what you are thinking).  You have by design an asymmetrical risk/reward.  You can lose 0.7 book value – you can win 1.3 (2-0.7) of a ‘growing’ book value.  introducing the stop will reduce your 0.7 loses down to ~ 5% of 0.7 but give you many more loses and in the process will also remove your exposure to the stocks that dip and then go on to be 2xbook exits.  The stop will also however increase your opportunities (you will churn through many more stocks) – which will give you more chance of picking up something that goes straight on with the job like RDG (if its actually tradable).   


RDG (profit $74,847) is only in the stop loss sample. You have it down as purchasing $20,429 on the 11/7

It traded $1,120 on 2/7 and $2,400 on the 16/7 – nothing in-between. 
Haven’t checked any further – don’t really need to because with just this one data point the back tests is nothing like reality – so it’s useless trying to draw conclusions from the results.
RY has covered the theory pretty comprehensively. 
We should always challenge theories with reality but it needs to be done accurately lest we deceive ourselves.


----------



## Joe Blow

*Re: Stop Loss is not always your friend....*

Just a note that I have moved this thread to the *Stock Market Nuts and Bolts* forum, as I feel the discussion is a little too advanced for *Beginner's Lounge*.


----------



## tech/a

*Re: Stop Loss is not always your friend....*



> We should always challenge theories with reality but it needs to be done accurately lest we deceive ourselves




So in the case of attempting to increase frequency of trading by (I wont call it a stop) exiting when you believe you have it wrong and re entering when you believe your right again.

As in the example in Trembling Hands Example of a session of trading.

The discussion so far appears to be around arresting outlier moves against us.


----------



## DeepState

*Re: Stop Loss is not always your friend....*



KnowThePast said:


> Hmm, I think we talked before about Mandelbrot and his criticism of using bell curves for share prices distribution.
> 
> What if stop less help to increase or reduce the number of instances of fat tails and outliers?




Same outcome.  Any distribution with  mean of zero and stops placed that are not directionally informed will yield the same outcome.  Stops do not lift the mean of the distribution.  If it did, we would have alchemy (something from nothing in a closed system - alpha is a closed system).  Alternatively, if stops destroyed value on average in this set-up, we would destroy matter/energy/money from within a closed system on a net basis.  Neither scenario is possible.  Brokerage and other costs are leakage from the system in reality or you can otherwise regard it as endogenous as you wish.

For every trade strategy taken, the market, as a whole, did the opposite (in terms of alpha).  If you place a stop in one direction, an effective (anti-)stop was placed in another.  Placing stops cannot generate value in and of themselves without accurate directional prediction.  One wins and one loses. Net zero before expenses. Every time. Any distribution with mean of zero.


----------



## DeepState

*Re: Stop Loss is not always your friend....*



tech/a said:


> So in the case of attempting to increase frequency of trading by (I wont call it a stop) exiting when you believe you have it wrong and re entering when you believe your right again.




An important step forward here.  

Let's say there is no concept of stops at all.  Every position we put on is driven entirely by insight.  The stronger the insight, the bigger the position.  The weaker the insight, the smaller the position.  The insight can lead to a reversal of the direction.  Conceptually, you can move from:

Massive Long -> Moderate Long -> Standard Long..... -> Modest Short....-> Massive Short

No stops.  All position size changes are insight related. If your insight is derived from price levels and even time in some way, you can plot what your position size would be for the whole forward surface of price/time.  You can do this without knowing what the price will actually be (because you can't really know what it will be).

If you have insight, you will generate coin.  No stops required.  If you do not have insight, you will generate nothing.

This is precisely the way in which 'signals' are converted to return estimates and ultimately to position sizes (even if the steps aren't quite this formal).  It is the exact way in which the concept of return is separated from risk management.  No move above is the result of risk management (except for the average position size that you determine at the outset).



As this important conceptually breakthrough has been made, let's progress a bit.  It doesn't matter where you get your insight from.  Your T/A will generate signals.  Some of them are price determined.  The signal strength changes as price patterns form etc. Others will do fundamentals etc.  What happens when you use stops?

Everything else stands as previously stated.

However, in my view, for most real life situations, even in the presence of insight, there is always the possibility that you will take a loss too large to bear. Sticking a stop there makes sense.  It doesn't increase your expected return if you have insight.  It reduces it.  However, you'd be nuts not to have it in place.  It is insurance.  You insure what you cannot hack.  In this way, directionally uninformed stops add value.  Not in terms of making money, but in cutting off the tail of unbearable loss.

I think we are very much on the same page now.


----------



## craft

*Re: Stop Loss is not always your friend....*



tech/a said:


> So in the case of attempting to increase frequency of trading by (I wont call it a stop) exiting when you believe you have it wrong and re entering when you believe your right again.




Its a while since I was a serious trader - but I do remember that a big driver to profitability was when I started exiting positions when I thought I wasn't right. Its a subtle difference to when 'you have it wrong'  the main difference at least with stocks, is that a not right exit will generally be less congested than a 'wrong' exit spot so you get less slippage and more opportunity because not right generally tends to be a shorter hold period then waiting for confirmation of wrong.

On one hand your break even loses could be considered an arbitrary exit that are an expense as per RY theory, but I suspect that at least on the DAX with your time frame they are acting as a crude 'I'm not right' (on the initial momentum) exit.  In which case they fall into the directionally informed category.


----------



## Ves

*Re: Stop Loss is not always your friend....*



craft said:


> Its a subtle difference to when 'you have it wrong'  the main difference at least with stocks, is that a not right exit will generally be less congested than a 'wrong' exit spot so you get less slippage and more opportunity because not right generally tends to be a shorter hold period then waiting for confirmation of wrong.



Think  this applies a bit to fundamental investing too.    Often my intuition picks up on the warning signs earlier,  but my rational / thinking function needs more confirmation / logic  (both on entries and exits).   I'm still playing around the edges with it  (mostly still in the latter camp),   but I have a feeling the former intuitive "hunch" might have more value than I give it currently.   There's a fine line between  "I might be wrong  but still need proof"  and "****,  I'm wrong"  sometimes.


----------



## KnowThePast

*Re: Stop Loss is not always your friend....*



craft said:


> That’s exactly what you will do (but maybe in the reverse of what you are thinking).  You have by design an asymmetrical risk/reward.  You can lose 0.7 book value – you can win 1.3 (2-0.7) of a ‘growing’ book value.  introducing the stop will reduce your 0.7 loses down to ~ 5% of 0.7 but give you many more loses and in the process will also remove your exposure to the stocks that dip and then go on to be 2xbook exits.  The stop will also however increase your opportunities (you will churn through many more stocks) – which will give you more chance of picking up something that goes straight on with the job like RDG (if its actually tradable).




Thanks craft, that's exactly what I was thinking.



craft said:


> RDG (profit $74,847) is only in the stop loss sample. You have it down as purchasing $20,429 on the 11/7
> 
> It traded $1,120 on 2/7 and $2,400 on the 16/7 – nothing in-between.
> Haven’t checked any further – don’t really need to because with just this one data point the back tests is nothing like reality – so it’s useless trying to draw conclusions from the results.
> RY has covered the theory pretty comprehensively.




RDG was a big outlier, but even after taking it out, there was still an outperformance of over 8%. And as you pointed out, a strategy with stop losses has more chances of picking up an outlier like this. So, it can't be discounted completely. 



craft said:


> We should always challenge theories with reality but it needs to be done accurately lest we deceive ourselves




Absolutely.  My initial tests did not agree with the theory. No challenge, it's been an absolute pleasure to work through it together with all of you to see what could have been off. 

There's been many posts of tremendous quality on this thread, thank you all. While I come away from it with anything I am likely to use, my understanding of the topic has improved vastly.


----------



## galumay

*Re: Stop Loss is not always your friend....*

Outstanding quality of debate in this thread, a fine example of what really makes ASF such a great site. I wont pretend that I even understand some of the more escoteric and mathematical points of discussion but it sure as hell has been a fascinating read!


----------



## burglar

*Re: Stop Loss is not always your friend....*



galumay said:


> Outstanding quality of debate in this thread, a fine example of what really makes ASF such a great site. I wont pretend that I even understand some of the more escoteric and mathematical points of discussion but it sure as hell has been a fascinating read!




I agree, and the participants were really well behaved!


----------



## craft

*Re: Stop Loss is not always your friend....*



Ves said:


> Think  this applies a bit to fundamental investing too.    Often my intuition picks up on the warning signs earlier,  but my rational / thinking function needs more confirmation / logic  (both on entries and exits).   I'm still playing around the edges with it  (mostly still in the latter camp),   but I have a feeling the former intuitive "hunch" might have more value than I give it currently.   There's a fine line between  "I might be wrong  but still need proof"  and "****,  I'm wrong"  sometimes.




Hi Ves, Good to hear from you.

Absolutely applicable to fundamental investing, the earlier your unique (and correct) insight the less your competition, the better your potential entry or exit price. Obvious confirmation will be seen by many and priced into the market relatively efficiently. 

In relation to this thread and stops – The type of investing we do is business analyse – we seek to follow positive business performance trends and transact when the value/price differential makes financial sense.  Any ‘price only’ based stops or exits or whatever you like to call them can only be arbitrary. For us using them can only be an expense that takes away from our potential business analysis return.  They might be an expense you are willing to pay to insure your liquidity or your tolerance to volatility, or losing your analyse edge etc, but they can’t increase the return.

The only way they will increase your return is if our business analysis abilities destroy value in which case the ideal price based stop is your entry price – ie you shouldn’t be investing fundamentally.


----------



## craft

*Re: Stop Loss is not always your friend....*



burglar said:


> I agree, and the participants were really well behaved!




Aw come on burglar - we never misbehave - we're just misunderstood.


----------



## tech/a

*Re: Stop Loss is not always your friend....*



craft said:


> Its a while since I was a serious trader - but I do remember that a big driver to profitability was when I started exiting positions when I thought I wasn't right. Its a subtle difference to when 'you have it wrong'  the main difference at least with stocks, is that a not right exit will generally be less congested than a 'wrong' exit spot so you get less slippage and more opportunity because not right generally tends to be a shorter hold period then waiting for confirmation of wrong.
> 
> On one hand your break even loses could be considered an arbitrary exit that are an expense as per RY theory, but I suspect that at least on the DAX with your time frame they are acting as a crude 'I'm not right' (on the initial momentum) exit.  In which case they fall into the directionally informed category.




*CRAFT*

Yes you are right---well close---for me with the DAX a twist though.

*The right bit* is that initially its more an exit than a stop.
Id never thought of it this way. But I do also place it as a stop.

Let me explain.

I think the best way is to explain my thought process in a trade.

I want my directional analysis to work immediately.
I want it to be in a lower time frame because my setup is going to be signaled in the first Hr.
So when I place the trade Ill also have a trade in the opposite direction in mind.

The questions in taking the trade  
How quickly will I know its the right decision.
How long is that decision likely to stay right.
Exactly where will I know the trade is wrong?

So initially that's where I'm at.
Trade taken and Ill either exit when I'm sure I'm wrong (That will vary)
OR Ill exit the trade when I see strong enough evidence that the trade is not going to stay right---normally in the first couple of hrs---if it indicates its going to range and I'm in the money but not really deeply---Ill also exit through boredom!---with some uncertainty of continuation

*The Wrong bit*

If I have a trade deep in the money and I'm pretty confident that I can trade on a longer time frame
Ill then set my B/E stop and go to bed.
I do this so I can sleep.
I often miss reasons that would have alerted me to exit a deep in the money trade with a profit---to wake up and be B/E or with less profit than I had when I went to bed.
I also have woken with a disaster avoided and in some cases a really present surprise.  

Its wrong because the stop is in an arbitrary point late in a trade (Given the time frame of the signal)
At B/E it has no reason other than stopping further loss.

But I agree with some I am on the same page----took a while for me to recognize that though!
A lot discussed wasn't in my book---its a very simple and easy to understand book.


----------



## fiftyeight

*Re: Stop Loss is not always your friend....*

So I have been pondering this thread today.

Here is what I have come up with, I think I have something fundamentally wrong

If a Stop never improves a system, does this infer that the best system is to simply buy and hold indefinitely?  Therefore a system can never beat the market? Are all the system traders wasting their time?

If when you close a trade never improves a system, is this the same for the entry? No entry method will improve the system so you may as well just buy when ever you have excess funds?

What about a system that only takes shorts? The markets over a long enough period will rise (hopefully), meaning the longer you hold a short the more money you will loose, therefore a shorter time frame stop should be more profitable?The converse of my first point.

Then I went round and round in circles trying to figure this out......


----------



## Habakkuk

*Re: Stop Loss is not always your friend....*

It's all break-even stops and arbitrary percentage or money-related trailing stops that hurt a system.
For a stop to add value it needs to have predictive quality. Same for entries. They need to be better than random to add value.

Not sure about shorts. But what you're saying makes sense.


----------



## tech/a

*Re: Stop Loss is not always your friend....*



fiftyeight said:


> So I have been pondering this thread today.
> 
> Here is what I have come up with, I think I have something fundamentally wrong
> 
> If a Stop never improves a system, does this infer that the best system is to simply buy and hold indefinitely?  Therefore a system can never beat the market? Are all the system traders wasting their time?




The argument placed here is that a stop wont improve a system that *DOESN'T* have a positive expectancy.



> If when you close a trade never improves a system, is this the same for the entry? No entry method will improve the system so you may as well just buy when ever you have excess funds?




No 
Its a culmination of a number of parameters---generally that leads to a positive expectancy Method/System
Entry being one.



> What about a system that only takes shorts? The markets over a long enough period will rise (hopefully), meaning the longer you hold a short the more money you will loose, therefore a shorter time frame stop should be more profitable?The converse of my first point.




No premise as explained above---but a short only method isn't simply a reversal of a losing long method.



> Then I went round and round in circles trying to figure this out......




Hopefully you now have a start.



Habakkuk said:


> It's all break-even stops and arbitrary percentage or money-related trailing stops that hurt a system.




Not entirely---a sweeping statement---do you have a basis for this argument?



> For a stop to add value it needs to have predictive quality. Same for entries. They need to be better than random to add value.




How can a stop have a predictive quality in itself? And no an entry doesn't have to be better than random a common misconception.



> Not sure about shorts. But what you're saying makes sense.




See above.


----------



## Habakkuk

*Re: Stop Loss is not always your friend....*

You're right, tech, it is a sweeping statement - I should have seen that.
How about this:

Break-even stops and arbitrary percentage- or money-related trailing stops hurt a system.
For a stop to add value it needs to have predictive quality.
Entries need to be better than random to add value.

I'm pretty sure you still wouldn't agree with any part of it.
Rather than explaining my points above, I would suggest the following:

You are obviously a very talented, successful, intuitive trader. Your entries will have been well thought out and are far from random. Therefore, a break-even stop should add value IN YOUR CASE.
Most traders are not that good, though (sorry, that's another sweeping statement), and for them a break-even stop is more like insurance. They didn't lose any money, but the trend probably continued without them after their break-even stop took them out of the trade. 

Similarly, your experience will tell you when a trend has run its course and to get out right away. That's kind of predictive. Others will wait for some "magic" percentage figure or a fixed dollar amount to exit. That is not adding value.

I can't prove any of this, of course.

On a lighter note regarding your often-made comment:

	"--- but a short only method isn't simply a reversal of a losing long method"

How about a really bad, consistently losing long method?
Wouldn't those signals be good for shorting?


----------



## tech/a

*Re: Stop Loss is not always your friend....*



Habakkuk said:


> You're right, tech, it is a sweeping statement - I should have seen that.
> How about this:
> 
> Break-even stops and arbitrary percentage- or money-related trailing stops hurt a system.
> For a stop to add value it needs to have predictive quality.
> Entries need to be better than random to add value.




Break even stops---For me they definitely alter my positive expectancy.
One of two things happen once I move the stop to B/E
(1) I'm stopped out at brokerage loss only 
OR
(2) I'm still in the trade and in profit when I wake up.



> I'm pretty sure you still wouldn't agree with any part of it.
> Rather than explaining my points above, I would suggest the following:




Very predictive--I cant say ANY part of it because I cant present a case for all situations which has a quantifiable 
background. 



> You are obviously a very talented, successful, intuitive trader. Your entries will have been well thought out and are far from random. Therefore, a break-even stop should add value IN YOUR CASE.
> Most traders are not that good, though (sorry, that's another sweeping statement), and for them a break-even stop is more like insurance. They didn't lose any money, but the trend probably continued without them after their break-even stop took them out of the trade.




Two vastly different situations---Both mine and the situation you present.
Certainly in Discretionary trading I have exited a position before my B/E stop has been hit because analysis tells me that that's the best course of action. Ive also re entered almost immediately in the opposite direction and often in the same direction of the original trade.

Now Systems trading is a completely different ball game.
Here you have a set of parameters and variables for entry and exit and sometimes coupled with various stops that are designed to give you a positive expectancy if you apply the buy/sell/stop orders as the system has been tested. If the system is well designed then the results should fall in the standard deviation of the results for the system against a data set provided the real time data doesn't differ substantially from the data used in the testing and design of the system.




> Similarly, your experience will tell you when a trend has run its course and to get out right away. That's kind of predictive. Others will wait for some "magic" percentage figure or a fixed dollar amount to exit. That is not adding value.




It may add value if it is proven through testing to do so.
My exits and entries are very very rarely perfect but by expectancy ($ lost V $ Earned) is helped dramatically by Stops (Lets call them early exits) and Break even stops in my discretionary trading.---Not to mention my sleep pattern.



> I can't prove any of this, of course.




You dont have to many are doing and attempting to do exactly that---Prove and or disprove.



> On a lighter note regarding your often-made comment:
> 
> "--- but a short only method isn't simply a reversal of a losing long method"
> 
> How about a really bad, consistently losing long method?
> Wouldn't those signals be good for shorting?




This is a long area of discussion.
But basically the entry for argument is that the entry for the long system will be perfect for a short system.
There is nothing about an exit--- there is nothing that has run its course on a short entry method so nothing can be proven.

Only an idea.---Give it a go.


----------



## Modest

*Re: Stop Loss is not always your friend....*

Could hedging be your friend? Price can either go up or down. Say your target is a long trade but price goes against you - after x amount of points against you (instead of a SL) could you not open an opposite trade in this case a short position with another target? 

Best case scenario you're going to breakeven/recover as soon as price starts going in the direction of your initial position (long) and you exit the short position.

I am no Professional and I would never attempt this in a Live account but would be interested to hear your thoughts.


----------



## tech/a

*Re: Stop Loss is not always your friend....*



Modest said:


> Could hedging be your friend? Price can either go up or down. Say your target is a long trade but price goes against you - after x amount of points against you (instead of a SL) could you not open an opposite trade in this case a short position?
> 
> Best case scenario you're going to breakeven/recover as soon as price starts going in the direction of your initial position (long) and you exit the short position.
> 
> I am no Professional and I would never attempt this in a Live account but would be interested to hear your thoughts.




A stop loss is placed where your analysis is proven wrong.
It doesn't necessarily mean it signals a trade in the other direction.
There is argument that a strong enough signal of a reversal to the direction
your trading could determine a close of one trade and an opening of the other
could be viable.
Don't have enough back on this to confirm.

I do note however there is a sad lack of information for trading short---setups systems tests etc.


----------



## DeepState

*Re: Stop Loss is not always your friend....*



Modest said:


> Could hedging be your friend? Price can either go up or down. Say your target is a long trade but price goes against you - after x amount of points against you (instead of a SL) could you not open an opposite trade in this case a short position with another target?
> 
> Best case scenario you're going to breakeven/recover as soon as price starts going in the direction of your initial position (long) and you exit the short position.
> 
> I am no Professional and I would never attempt this in a Live account but would be interested to hear your thoughts.




I think what you are describing is essentially a partial stop followed by a pyramid if the position becomes more profitable after the (partial) stop has been hit.  If these stop points and pyramid points are not directionally informed by a process which has predictive value, they won't make you money overall.  

What they will do is to increase the likelihood of any overall trade finishing as a loss making one at some point in the future. However, it will clip the tails of the extremity of those losses in exchange for this.  Depending on how aggressive your pyramiding goes, it will also skew the upside (in exchange for increasing the likelihood of taking a loss).  

Overall, no change to profitability can be anticipated on average through time if these points are not obtained with the benefit of some method that can predict future price direction.


----------



## KnowThePast

*Re: Stop Loss is not always your friend....*

Another one along the same lines is "sell half when doubles", or other similar strategies, that force a sale on the way up rather than down.

Again, a blind following of this should lead to less risk while reducing absolute return.


----------



## Kylie9090

*Re: Stop Loss is not always your friend....*

I've just been reading about "Stop Loss Hunting".  Apparently some brokers and Institutional Traders have access to information on where Stops are placed.  Apparently sometimes they make trades to trigger these stop losses if there are enough stop losses placed at a given point.  

Now I'm spooked about placing stop losses.  Are my concerns real, or is this something that vary rarely happens?  Also, I'm trading FOREX (demo account only at this point), and am thinking that the market is too large for most brokers and/or Institutional Traders to affect the price in such a way to go "stop loss hunting"?


----------



## cynic

*Re: Stop Loss is not always your friend....*



Kylie9090 said:


> I've just been reading about "Stop Loss Hunting".  Apparently some brokers and Institutional Traders have access to information on where Stops are placed.  Apparently sometimes they make trades to trigger these stop losses if there are enough stop losses placed at a given point.
> 
> Now I'm spooked about placing stop losses.  Are my concerns real, or is this something that vary rarely happens?



After years of trading OTC derivative  products I'd certainly caution against the placement of stops on any OTC products.  I've seen no end of highly suspicious price behaviour whenever the market is within proximity to conditional orders. At times I've also had wide stops (sometimes more than 2% away from market)  that were spiked with a spooky degree of precision. 



> Also, I'm trading FOREX (demo account only at this point), and am thinking that the market is too large for most brokers and/or Institutional Traders to affect the price in such a way to go "stop loss hunting"?




I've encountered numerous trading novices expressing such sentiments. I've even seen a magazine article where a very popular trading author said something quite similar. My typical response is to the effect that computer technology coupled with poor financial regulation provides an easy opportunity to profit from unscrupulous business practices in the OTC derivatives market.

Why would the OTC provider/broker choose to place client orders into the real market, thereby settling for a mere few points/pips profit per trade, when it is so much easier to simply retain the exposure in the knowledge that the client will in all likelihood lose much of their trading capital anyway?

Many in the industry hold the view that the vast majority of traders lose, hence, it is easy to understand the reason for gravitation towards an interest conflicted business model where the broker/provider seeks to bolster their profits by betting against their own clients.


----------



## burglar

*Re: Stop Loss is not always your friend....*



Kylie9090 said:


> ... Now I'm spooked about placing stop losses.  Are my concerns real, ...




1.) The Broker is not your friend.
2.) The Broker does go to lunch. (little lunch, whatever)

I assume that brokers are human. 
When on Testosterone-driven, Entertainment-seeking activities, 
I imagine them to be trading counter to the wellbeing of clients. 

Your concerns are real, ... 

As to how often it happens, ... 
The broker will not supply you the statistics.


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## Wysiwyg

*Re: Stop Loss is not always your friend....*

The whole system operates to relieve participants of their cash. If it wasn't "orchestrated" in the way that it is then there would be even less winners because there would be less losing players to feed on. Dirty tricks? You betcha. I lost $50 today. The croupier should be happy.


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## Kylie9090

Damn, I was hoping you guys would tell me the opposite.  So what is the answer?  Don't place stops?  Try and place stops where you think others won't place stops, therefore you won't be part of the group that gets wiped out?  Or don't trade at all?  Some other answer?


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## rb250660

Newbs place stops in the market. :bricks1:

I don't even use stops.


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## Kylie9090

But I've read on this blog, and other blogs, where people say the opposite; that only newbies don't use stops?


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## Wysiwyg

Why not exit the trade when your analysis is invalidated by contrary price movement. Just wording it differently is empowering.


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## nulla nulla

I expect a few stop loss settings for FMG would have been blown off with this mornings open.


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## burglar

Kylie9090 said:


> Damn, I was hoping you guys would tell me the opposite.  So what is the answer?  Don't place stops?  Try and place stops where you think others won't place stops, therefore you won't be part of the group that gets wiped out?  Or don't trade at all?  Some other answer?



I have had an angry exchange of email with my broker over a very badly handled trade.
I have never trusted the broker.
He is a *sorely conflicted *individual (as he is on both sides of a trade) !!

My method goes something like this:

I am very slow to type in an order.
On top of this, I am indecisive.

So I decide a stop-loss *before I buy*.
Earlier, I had no access to advanced conditional orders.
Now that I have access, I don't use them - pixel has me running scared.

So my stop loss is *soft* (in my head and is under continuous revue)

This does cause me excessive screen time; something I am prepared to do anyhow!


Hope this helps.


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## Kylie9090

Still on my demo account, but I plan to trade for real in the not too distant future.  I plan on using the longer time frames, probably daily.  So I expect some of my positions to last days, maybe weeks.  I don't think I could sleep if I did not have a stop loss there, just in case the market swings big time while I am at work or sleeping.  

Unfortunately, this stop loss hunting thing has me worried now as well.  Seems like you can't win no matter what you do.


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## tech/a

Kylie9090 said:


> Still on my demo account, but I plan to trade for real in the not too distant future.  I plan on using the longer time frames, probably daily.  So I expect some of my positions to last days, maybe weeks.  I don't think I could sleep if I did not have a stop loss there, just in case the market swings big time while I am at work or sleeping.
> 
> Unfortunately, this stop loss hunting thing has me worried now as well.  Seems like you can't win no matter what you do.




If your trading method is enhanced by using stops then use them.
If you don't know then find out through testing (preferably with software so you have an adequate sample size)
with and without stops.

If you don't know and its simply for peace of mind then your not ready to trade yet as your don't know if your putting stops on a method which hasn't a hope of trading profitably---with or without a stop.


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## rb250660

Kylie9090 said:


> ...just in case the market swings big time while I am at work or sleeping....




If you fall victim to an opening gap nothing will save your capital. Have a look at ACL late last year. As wysiwyg said, when your analysis is proven wrong, that's when you exit.

Intra-day stops being tagged when they're gunning for them is a big issue too. Last year I was watching LNG (30/6/14), it opened ok, dropped 17% intra-day and closed flat. It then continued the trend to rise 100% from there over the next 4 or 5 weeks. I'd be pretty upset if my stop got tagged in that case.


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## Boggo

rb250660 said:


> It then continued the trend to rise 100% from there over the next 4 or 5 weeks. *I'd be pretty upset if my stop got tagged in that case.*




Aaah, human psychology, the most expensive trading item you will ever get for free.


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## rb250660

What?


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## tech/a

rb250660 said:


> What?




You know the stock turned and rose 100%

*But as its happening* human nature keeps saying in the back of your head 
Its going to turn up soon

Then when it doesn't Human nature says---crap I don't want to liquidate a $500 loss---I'm holding it will turn up.
Then when it doesn't Human Nature says---crap now its down $1500 no way am I going to liquidate that loss---Im holding it cant keep falling.
Then when it DOES Human Nature says---Down $5000 Ill stick this in the bottom draw---Everyone who has sold this is crazy----Ill hold it will come good.
I haven't copped a Loss because I haven't sold it---*RIGHT!*

Boggo is *SPOT ON!*



> Aaah, human psychology, the most expensive trading item you will ever get for free.


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## Boggo

Thanks tech/a, you explained it perfectly.

Bottom line rb250660, a stop is a process. When it is placed it is there to protect you from a loss if you are wrong.

Should a stock or whatever turn back up after your stop has been triggered then if you can choose to re-enter, it is now a whole new trade process.
The only thing that is the same is the name of the entity (and maybe your stop trigger point if the last point is still a valid one).

Treat it as a mechanical process using numbers, start involving woulda, shoulda or coulda and its gambling.

Not having a go at you, if you look back at it just look at why it turned up.
Was your stop too tight, was there positive news, should I have looked at a longer time frame, did the Dow jump 500 points and carry it on the wave of emotion etc etc.


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## Nortorious

Boggo said:


> Thanks tech/a, you explained it perfectly.
> 
> Bottom line rb250660, a stop is a process. When it is placed it is there to protect you from a loss if you are wrong.
> 
> Should a stock or whatever turn back up after your stop has been triggered then if you can choose to re-enter, it is now a whole new trade process.
> The only thing that is the same is the name of the entity (and maybe your stop trigger point if the last point is still a valid one).
> 
> Treat it as a mechanical process using numbers, start involving woulda, shoulda or coulda and its gambling.
> 
> Not having a go at you, if you look back at it just look at why it turned up.
> Was your stop too tight, was there positive news, should I have looked at a longer time frame, did the Dow jump 500 points and carry it on the wave of emotion etc etc.




Great post Boggo, couldn't agree more. Process is everything, plan the trade and trade the plan.... if not, head to the casino and bet on 22 at the tables.


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