Consecutive losing trades…How many can you take?

Indeed it has moved.

 

NeoRio - Could you please explain why the consecutive losses are not so important?

 

Some authors (e.g. Lance Beggs) have suggested that traders (especially mechanical) do not see the relationship between tight stops and consecutive losses. This causes them to design strategies that produce tight stops to control risk but in the process create more consecutive losing trades. These traders are ok with the risk per trade but wash out of the system when they hit a longer than expected string of consecutive trades.

Do you ignore consecutive losing trades when designing your stop losses?

 

You talk about the stop as an arbitrary price point. Your stop if violated should mean that your original premise was wrong,and optimally you should be able to enter in the opposite direction.

 

Stops are not arbitrary. But stops can be generated by many different techniques that make them tight or loose. For example stock traders stop can be based on some multiple of ATR’s and can be moved at lower or higher multiples causing it to be tight or loose. In another stock traders case of stops being loose or tight is with a trailing stop as the percentage it trails makes it lose or tight. There are many stop generation techniques that can generate stops that are loose or tight.

I understand many ET traders use fixed position stops especially in futures or forex trading. I did it for years. To these traders these fluctuating stops may look arbitrary. These traders who place stops one tick below the bottom of a price bar don’t need to use these types of stops I mention above.

Violation of the stop does not necessarily mean the original premise or strategy is wrong. I have heard that for years and it is not necessarily the case. One strategy I have traded for 10 years often has problems with excessive stop outs. It is not the strategies fault. What causes this is change in volatility. The strategy will produce for months on end until volatility becomes too high. When this happens I simply shut off the strategy until volatility is back in line (it is an automated strategy).

 

IMO a good stop is the one that proves you wrong. Or you take few small (fixed) stops around the same area till proven wrong.

 

It’s an interesting view of stops being in the right or wrong category. The words “right” or “wrong” imply to me that they have an emotional cost or “being wrong” or “being right”. So I do not use them. It tells me the trader that they were taking a trade to be “Right”.

Stops causing the associated wins are losses just create business transactions to me. A loss is just a cost of doing business and not a “wrong” decision. The question is when do too many losses mean the business is not working right. The question is “How do you set limits on consecutive losses to know when the strategy is not working?”

 

I agree, Rabbitone. A losing trade doesn't prove "you" wrong. A trade is put on based on a setup which leads you to believe the price has higher odds of moving in one direction than the other. The stop is nothing more than a price level in which the setup would be invalidated.

You short a stock at 33.90 because it pulled back from a lower high. You place a stop at 34.05 because the lower high was 34.00. A break back above 34.00 means the bulls might still have some margaritas left in the blender.

A trader who manages money well is always right, though many setups may be invalidated along the way.

 

I concur. Any drawdown at all deserves a look at the overall trend and whether you're in touch with it.

And if in doubt, stay out. No matter how good the system.

 

My questions to you are: How do you know when the system is not working the way it is supposed to? How many consecutive losses are one too many? When should the system be reevaluated (shut off) and when should it be left running?