You finally got it! Traders only use stops because it is something that everyone just does as part of the industry. It has absolutely nothing to do with money management or intelligent trading. You go right ahead and trade without stops whenever you want to, bunny rabbit. It's okay. P.S. Don't quit your day job. Ever.
I have backtested plenty of systems that do better without any stops. There are two important caveats: 1) they are not strictly daytrading systems, and 2) they are "self-reversing", in that they generate their own exit or stop and reverse signals. In general, a good system will rpoduce superior results without using stops. Now here is where backtesting can fool you or lull you into a false sense of security. People will say, ok you may be right but I don't want to take that 10 point hit when the market hits an airpocket. What they don't realize is they most likely will take that hit anyway, no matter what their stop is unless it is way too tight for profitable trading. The reason is there are no buyers when you hit an airpocket. Everyone gets filled at the low of the move, eventhough your backtesting software might indicate otherwise. This has changed a little with the advent of globex, as you may be quick enough to get filled on a few contracts, but in general you are still toast. Why does a good system do better without stops? Because stops are a very arbitrary way to exit a trade. Of course, you can use adaptive stops,etc. but most of you are using a fixed number. I do the same thing daytrading. But with a system that is designed to catch the big move, the last thing you want is an arbitrary exit. Instead you want to specify the conditions that will prove the trade wrong. Then you use a mental stop as disaster or system outage insurance, but in practice it will never get hit. The typical problem that traders face is they don't want to take the per trade risk that the system needs to work. So they kid themselves that they are limiting risk by using a stop that is too tight. You can limit the per trade risk, but you cannot limit the risk that is a function of volatility and leverage. You just end up paying the piper another way through a worse win/lose ratio and cutting off potential winners too soon.
But you are forgetting one of the most important reasons to use stops. What you will find in virtually every case in backtesting and trading without stops is that your "time-in-market" is significantly increased while you wait for your mistake to correct itself. A big part of risk management is limiting time-in-market and maximizing efficient use of cash. This means taking losing trades out of the picture so you don't wrap up capital with a pile of crap in your account that turns you into your own long-term personal mutual fund.
To add to your comments above. Stops, formal or informal, do affect money velocity. If you look at market timing and in particular, between formal events you do, you will see that there is room in monitiring for informal stops (See Wizards). Consider your action as the top layer (most important) and then layer downward from there with other levels of market considerations and configurations. One of those levelscould be "news". A Wiz probably has handled a spectrum of news. One of the news scenarios that is most common is the spike. All spike have two sides. Most of the volume on spikes has to do with protection systems and computer trading de facto stuff. Think of many other items for these layers under your action. You have the choice of sidelining automatically with a level of damage or you may look at the solutions available to Wizes who operate in probably the largest contruct of considerations. I believe there are two tradeoffs for everyone. One is to do a protection activity informally between your trade events. The other is to focus on a trading strategy who emphasis is the immediate market operating point. A combination of both would be optimum. the first yields for you an informal iteratively refined stop that is always before you and revised continually. It is backed by a routine C&R update period where the informal stop becomes the formal stop. The second is a focused trading strategy thatdoes one majot thing as requireded. That is, for a given market pace, you always stay on the right side of the trade. This piece meals profits to you and at the same time keeps you in the immediate vicinity of market prices. At some point people recognize that they have gone through several stages of dealing with stops in their approach. they have winnowed out lesser safe guard approaches and get to good protection which is divorced from making money. I think reading the Wiz stuff periodically is really a good pastime. Things click once in a while. It doesn't seem to be primarily a confidence issue; on the other hand it does seem to be related to the boring day in day out realization of the context of the market that is being traded. The greater the consciousness of the bounds seems to lead to a better feeling and context of price values and, concurrently time passing. You can see the ruffles better when the two things above are part of the monitoring.
The guy who trades without stops was Tom Baldwin. He's a floor trader and he has an edge of being in the floor. Also, Baldwin lost a lot of money and he's not trading in the floor now. He made a lot of money and had a plenty saved up so he's living doing other businesses. I've heard he owns a office building in the Chicago Financial District so he's still successful in different terms. Another thing about not placing stops in the floor is that the game is different. It's more about order flow and it's a different game than trading electronic. At most times, the order flow would be showing the buyers weakening and sellers get stronger. Allowing the locals to go short at the top. But sometimes, the buyers get weak and sellers might stay out allowing the market to stay mixed until the buyers start getting strong. This is one reason locals have a hard time adjusting to electronic. Not that I'm saying the market's ebb and flow exists only exists in the floor. It's just a difference in how they identify edge. (Market Profile has a good explanation about this) Another thing about locals are that they don't have money management like how they teach in books. It's more of a instinctive money management like leaving for the or trading small because you feel that the market isn't friendly to the trader. As for stops, no you don't need it, if you can ride the wave. Also, as for scalpers, you're expected to scratch a trade or take the 1-2 tick loser. Another is, you're in the market under a certain conviction. You get out when that conviction starts to look bad. It's more of a mental and decisive passiveness.
Check out "When Genius Failed" by Roger Lowenstein (Long-Term Capital Management) to see just how much can be lost putting complete faith into a stopless system. It's a good read. And while bond arbitrage is quite different from NQ 3 min's it's a darn good lesson. As far as I can tell, everyone here has developed a statistical model of the market (trading off signals). They back test it to verify it's statistical significance. Given "normal" markey behavior they make buckets of money, and everyone is happy. However, "once-in-a-million-years" events happen quite often on Wall St. causing these models to be totally wrong. Equity markets in particular tend to exhibit "fat tails" type distibutions. As a result statistical models that assume Normal (Gaussian) distributions break down more often than we'd like.
It's called a trailing loss. In ensures maximizing a loss when the market moves against you. I believe this guy tried it at one point during the movie:
That's what I've found as well; systems that generate their own stop/reverse signals do better without stops. I'm not sure I'd go as far as to say that this is true of all 'good systems', ie, some 'good systems', I believe anyway, would do better with stops. (But I haven't got one of those, so I can't really say. ) Of course, I don't think I could ever bring myself to trade without stops, but it's a fair call that stops deteriorate most systems' performance (but, perhaps paradoxically, ensure long term success.) It's amusing to hear the adamant opinions proferred by those passing on the received wisdom from something like, I'm sure, 'Beginning Electronic Daytrading'.