Stop Loss is not always your friend...

[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....

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....

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....

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....

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....

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....

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....

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....

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....

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....

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....

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....

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....

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....

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....

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....

(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?

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.