You make a good point that perhaps I'm just using the wrong choice of words. Sure, we can call it "managing emotions" so that your mind operates without interference from emotions. What were some of the things you had done to manage your emotions?
There is no "right" place to put a stop.... "anywhere" can be just enough off to get picked-off before a reversal. You could have a long with a stop "1 point below the last swing low, or 1 point below that prior double bottom"... and have the market come down and take you out by .50, before reversing back up. So, why 1 point? Why not 2? And could your "2 points below..." stop get nailed before a reversal? (How about 3, or 4?) Of course. So, I say, ARBITRARY!
Hi Gnome, I agree with Whitster here. The way you set your exit for a losing trade is crucial to over all performance of any trading strategy. Setting them at arbitrary levels and just hoping to get lucky and not stopped out before the market moves your way is a bad idea.
I'm not saying the "logical" placement of stops isn't important. But still, you don't know where for sure is the right place. So, you pick a logical one... that in itself is an arbitrary strategy. Sure, tight stop sounds bad. But think of the times you get swept immediately along... and the cost for that is a bunch of small stop-outs.
no, they are not arbitrary. study a little game theory. there is not necessarily ONE optimal strategy in any "game", but there are various strategies based on positive expectancy and other statstical probabilities. so, they are not arbitrary. arbitrary would be, for instance "a 10 pt stop" i know some guys who scalp the dow, who use a 10 pt stop for all their scalps. and that's fine. but it's arbitrary. if your stops are based on data, they are not arbitrary, any more than any game theory decision made upon a probability matrix
From WordNet (r) 2.0 : arbitrary adj : based on or subject to individual discretion or preference or sometimes impulse or caprice; "an arbitrary decision"; "the arbitrary rule of a dictator"; "an arbitrary penalty"; "of arbitrary size and shape"; "an arbitrary choice"; "arbitrary division of the group into halves" [ant: nonarbitrary] So a stop that is place under prior formation or at a level where retracements has a 70% chance of not reaching would seem to be nonarbitrary. Actually even always using a 10pt stop would seem nonarbitrary. If and only if that rule is based on something other than individual discretion or preference. I love it that I can disagree with both of you at once. Aint ET grand
People who have trouble managing their emotions, much less trading without emotion, are convinced that trading without emotions is impossible. That, fortunately, is their problem, not yours. However, the issue you raise with regard to taking profits early may have nothing to do with emotions. You may be detecting trouble that's not part of your strategy, and to hang on until you either reach your target or get stopped out may not be the responsible thing to do. Without knowing anything about your setups or your strategy, it's impossible to say. I suggest, however, that you write down exactly what's going through your mind when you take those early exits, especially with regard to what it is you're seeing in price action that bothers you. Or get a digital voice recorder (you can buy an Olympus through eBay for only $20 or less) and make oral notes. If the problem is simple fear that you're not getting the last possible cent out of the move, that's one thing. But you may be able to solve the problem with conditional and pre-emptive stops. LC
Yeah...I realized this could be a difference of opinion due to how we define emotionless. What were some of the things you had done to manage your emotions? There are usually two reasons that traders have problems managing their emotions while trading: * Related to things in our personal lives (outside of trading) * Related to our trading plan...specific to trading. My problems (when they do occur) are more often than not related to something going on in my personal life. Thus, to manage the emotions in my trading, I need to resolve the problem that's occurring in my personal life. However, I'm talking about now and such wasn't the case when I first begin my trading career. When I first started trading, problems with management of my emotions was directly related to an inadequate trading plan. With that said, if you fall in the group that your trading problems are not related to things occurring in your personal life... Guess what??? There's something either wrong with your trading plan or the market is doing something to spook you out of your trades prior to price reaching their destination (profit target). I'm not perfect and every once in awhile...I do early exits prior to a profit target being reached. However, when I review my video screen recording of my trading day (I use Camtasia Studio), I usually see the same similar like cause for my early exits. It occurs when I'm doing too much analysis (over analysis) and I can tell this because I'm quiet and my audio and screen recordings via Camtasia reveals very little interaction on what's occurring on my charts. Simply, I sitting there staring too much at the price action. Not day dreaming...doing too much over analysis. Trades I don't do early exits occurs when I'm more involved (interacting) with other things occuring on my monitors. My point, overanlysis causes tunnel vision and not in a good way. When we get tunnel vision...we tend to see in a straight line and forget about the things that's within our peripheral vision sort'uv speak. Those things in our peripheral vision helps us maintain a level of awareness to other things in our trading environment and that helps to produce a calm like mind state during critical aspects of the trade. However, the things that's occuring within our peripheral vision cannot be related to the actual trade or else we are right back where we started again... Tunnel Vision. My peripheral vision involves the following while in the trade: * Preparing or analysis for my next trade. * Active in talking about trading in my favorite chat room. * Updating my trade journal to include info about something from my personal life (not related to trading) that I was thinking about while in the trade. * Simple physical exercises not too far from my trading desk and within view of my monitors. All the above is occurring while knowing my trailing stop is in place and there's nothing more I can do until either the price action reach its profit target area or the trailing stop is hit. That brings me to another question concering your trailing stop management. Are you exiting too early at a price between your trailing stop and your profit target??? If not and your associating early exits with trailing stops being hit... That implies you have a trailing stop management problem. However, if your trailing stops are not being hit and your doing exits before profit targets are being reach, your early exits may be related to tunnel vision and not in a good way as I've discussed above. Mark
actually, kiwi - i agree with you. his 10 pt stop is simply non-arbitrary in the respect of risk management. he decided that he doesn't want to lose more than 10 pts (he trades 5-10 contracts at a time) in any trade, so he set the stop - a "money stop" based on risk/money management. but it is arbitrary in terms of trade structure. iow, he did not study his setups and determine the stop distance based on positive expectancy, etc. now, obviously, overall it has positive expectancy (or he would be a losing trader), but there was no optimization strategy based on trying to optimize based on setup/structure/data and desired outcome (one trader might prefer 80% winning trades and be willing to accept that 20% of his trades will lose 30% more pts than his average winning trade, another trader might prefer 65% winning trades, with a average win of 6 with an average loss of 4, etc.) i don't think the person who is disagreeing with us understands what arbitrary means. the dictionary definition was quite clarifying he seems to think that if your stop is not optimal for THIS trade (at this moment in time), then it is ARBITRARY. it's not. all trading is probabilistic, not deterministic. that does not render these decisions arbitrary, of course. a simple example of this is "the prisoners dilemma". certain decisions will be the optimal strategy, but it does NOT follow, that in any particular instance (any "n" to speak in statistical parlance) that it will have been optimal. only that the strategy has the best cost/benefit tradeoff in regards to the goal desired. similar decisions can be made as to position sizing. there is no ONE optimal position sizing based on (for example) a trade that has 1) 70% chance of winning 2) but a losing trade loses 6 points. and a winning trade loses 8. because you have to define what is most important to you - 1) avoiding risk of ruin, 2) return 3) minimizing drawdown etc. etc. etc. a trade strategy that optimizes position sizing in order to minimize risk of ruin would be suboptimal for maximing positive expectancy. again, it is NOT arbitrary. but it depends on goals. as long as data is being incorporated, and/or the stop is made consistent with predefined goals - it is not arbitrary.