Stop Loss is not always your friend...

tech/a · 14 December 2014

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 · 19 December 2014

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 · 19 December 2014

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 · 20 December 2014

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 · 20 December 2014

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 · 21 December 2014

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 · 23 December 2014

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 · 23 December 2014

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 · 23 December 2014

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 · 23 December 2014

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 · 12 January 2015

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 · 12 January 2015

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 · 12 January 2015

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.

Wysiwyg · 12 January 2015

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.

Kylie9090 · 13 January 2015

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?

rb250660 · 13 January 2015

Newbs place stops in the market. :bricks1:

I don't even use stops.

Kylie9090 · 13 January 2015

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

Wysiwyg · 13 January 2015

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

nulla nulla · 13 January 2015

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

burglar · 13 January 2015

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.

Stop Loss is not always your friend...

tech/a

No Ordinary Duck

fiftyeight

Habakkuk

tech/a

No Ordinary Duck

Habakkuk

tech/a

No Ordinary Duck

Modest

It's in the chart

tech/a

No Ordinary Duck

DeepState

Multi-Strategy, Quant and Fundamental

KnowThePast

Kylie9090

cynic

burglar

Wysiwyg

Everyone wants money

Kylie9090

rb250660

Kylie9090

Wysiwyg

Everyone wants money

nulla nulla

Positive Expectancy

burglar

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