Stops hurt strategies. We have conducted a lot of research on this. I would be very interested in anything that would give a clue of a specific strategy not hurt by stops. Anyway, "cut your losses short and let your profit run" != "use stops". It's a common misconception though. Ninna
In my mean reversion strategies I sell strength and buy weakness. Don't think I want to get more specific than that in an open forum but I might by PM. I was influenced by Larry Connors but set my exit rules based on my own testing. I would love to use a simple method such as a stop to limit my losses, but I've tested it every which way and it always hurts the overall results. Edges are hard enough to come by and stops are not necessary for risk control so I do without them.
<quote>For your profit target, scale out of your position using a trailing stop once that original target level has been achieved. </quote> Scaling out of profitable positions, or letting my profits run, is on my to do list... Have you considered opportunity cost, of trying to get extra profit, but sacraficing usng that buying power to enter a totally new position instead?
<quote>"Anyway, "cut your losses short and let your profit run" != "use stops". It's a common misconception though. Ninna" </quote> The way interpret this rule of thumb was to shorten your hold time for losing positions, and lengthen your hold time for winning positions. It is NOT what I currently do, my avg loser hold time is slightly longer than my avg winner hold time.
In my simulations this is considered, and a key measurement that I use is %gain/stock/day. I seek to maximize this number. In general I find it is pretty much a wash between cutting the loss after x days on the losing position or just waiting for my normal exit signal.
For me it does, because I am a day trader, and one of my primary trend lines traces any reversion to the mean. So, as long as the trajectory of price stays on track, I remain in the trade. When it is no longer aligned, I exit.
Yes, it is very important to stop in the trading process on time in order to protect yourself from losses.
'it depends'. not the answer you wanna hear, but true for example, I have a few spreads I trade where I set super tight stops. they get hit more often than not, and my win rate is ugly. but my system targets outliers, and while theyre rare, when they happen theyre obscenely profitable and dwarf my tick sized losses. in this case, I follow the adage. conversely, google proebstings paradox wrt mean reverting spreads. specifically, check the kelly chapter in Sinclair's book. sinclair (and the papers he references) argues that as your spread moves against you, you should be adding to your position to hold σ/2, as your increase in edge > your accruing losses. BUT, this applies only to a point. IIRC the derivation returned a maxima @ σ = √2, beyond which your accruing losses > your increase in edge
I think that it is best to bracket any intraday or short-term position with stop-loss and take-profit values. The stop-loss value represents the maximal lost I am willing to absorb upon failure. The take-profit represents a compromise between good enough and maximal gain. These bracket parameters should be calculated before making the investment, because afterwards psychological stress can take over. Also after taking the position it is prefered to refrain if possible from constantly tracking the investment.
That tends to work well/very well, especially in longs/long trends; even though an inverse ETF, take some profit targets sometimes, due to violent mean reversals in shorts..........................................................................................