Money Mgmt beats Stops Everytime - Example

Discussion in 'Risk Management' started by ProfitTakgFool, Jul 24, 2008.

  1. The accepted method of trading is to put on a trigger and manage risk by using stops. It has been my experience that a system that relies on stops to manage risk reduces the performance of a similar system that using Money Management instead. Case in point, today's fall on the Russell.

    The ER2 has a tendency to fall a full point in a matter of seconds when the market is falling. What is occurring when that happens you wonder? It's very simple....stops are being hit. And what happens after stops have been hit? Again, it's pretty simple....the market bounces and/or rallies. Pull up the chart.

    Trigger 1: 16.30. This one triggered right at the bottom of that candle and was executed at the market because the ER2 fell about 1 point in 3 seconds -- stops are getting hit so I buy. The market goes below that low and would have triggered my stop <i>if I had one</i>, but of course I didn't. In fact, I wanted to add to the trade down there but couldn't get the order up fast enough. Market bounces and triggers my exit at the high of that candle, which was basically dumb luck. I would have been out up there somewhere because I would have lowered my exit but I'll take the gift.

    Trigger 2: 15.30. This was the order that I wanted to add earlier but I couldn't raise it fast enough so I left it there for a test of that low. Sure enough, the ER2 falls about a full point in 3 seconds right into my order. Price eventually goes lower and would have triggered my stop <i>if I had one</i>. In fact, the ER2, again falls about 1 point in 3 seconds so I add to the trade. Instead of stopping out with a loss I'm increasing my position at 14.00 right at that low. The market goes below that low and fell a full point in about 3 seconds and would have triggered my stop again <i>if I had one</i>. Instead, I'm buying again at 13.00, right at that bottom. Sure enough we go to yet another low that would have triggered my stop again <i>if I had one</i> and would have taken me out at the exact low of the day (at that time). I wanted to add one more trigger at that bottom but I took my eye off the chart to see what the ES was doing and missed it. I was hoping the market would come back to me but that wasn't the case. Oh well.

    The market finally recovers and runs into my orders where I take my profits. Had I used a traditional way of trading and used stops I would have had 4 big fat losses but instead, I have one nice win and one big fat win. I am doing the exact opposite of the crowd. I am buying when they are stopping out and then selling into what they are buying.

    An Important Note: This strategy doesn't come without risk of course. You really need to know how to read the market and you need to be pretty good about sniffing out the bottoms. If you go review my triggers you'll notice that I'm buying pretty near the exact bottoms of the candles so obviously I've a lot of practice doing this. Don't try this with real money if you want to give it a shot. I'd recommend at least 2 months on a simulator. You <b>really</b> need to be able to read price action. If you don't have a good grip on price action then this strategy comes with some significant blow up risk.

    Oh, and many ways to skin a cat. There as many strategies as there are traders so if what your doing works then trade on my friend, but if what you're doing isn't working then perhaps there is <i>another way?<i>
  2. MGJ


    Howard Bandy's book Quantitative Trading Systems (link) . . . {alternate link, at Amazon} agrees with you. On pages 313 to 315 he lays out his conclusion Stops Hurt Systems. It includes this little snippet:
    • The worst way to exit is the maximum loss stop. For one reason or another you may be required to have a maximum loss stop in your code, but try to design your trading systems so that one of the other methods causes almost every exit.

      My research indicates that stops hurt all systems.
    On the other hand, my (MGJ) own personal research indicates that stops help some systems and hurt others. So I disagree with Bandy that stops hurt all systems. But hey, that's just me. I might be crazy. See*#post1832481 for an example.

  3. Thanks for the heads up on that book. I'll check it out.

    There's another element to this strategy that would take WAY too long to explain and that is time. In a nutshell, the longer the market goes sideways w/o showing you a profit the greater the risk becomes and stopping out may be necessary. The best time to put on a trade like this is right after the opening bell because that is where the volatility is. It's very dangerous to do this in the PM because that's where trends tend to develop. Experience is key to all trading systems.

  4. "Trade without stops"... one of the most stupid concepts ever.

    Promote all the examples you want... they're all TOO SHORT OF TERM... Trade without stops and the market will destroy you!!!!!!!!!!!

    Maybe not today or this year.. but eventually.
  5. I don't see what this has to do with money management. OK, so your strategy doesn't use stops, but rather doubles down when every trade goes against you. Are you trying to say that you never have losing trades? And what is your reward/risk in these scenarios? While there is nothing wrong with counter-trend trading, you need to have deep pockets and a bit of luck. Surely there is a point where you will sell at a loss. How many double downs do you take before you give up? Are those situations where your losers are signifcantly higher than your winners? I've seen more than a few accounts blown out this way, but if it works for you, more power to you. watch out for that black swan!
  6. Stop reading pulp fiction!
    Look at your stops as function in your money management/risk metric context, so you can quantifiable get the maximum reward of your trading.
  7. Nope, not saying I don't lose money but when I do I determine when and how I lose it, not the market. And to whoever else wants to tell me I'm going to blow up and that I'm not using money management, you're dead wrong. I trade small with a large account and manage the fluctuations of the market with that size. Whoever comes on this thread and says this is a stupid idea has completely no understanding of how to use statistics to analyze the market. There is one LARGE missing ingredient to this system that I will never give away.

  8. Yeah I know, I laugh my stupid ass off all the way to the bank!

    Gnome, you make it sound like I will just keep buying and buying and buying and buying and buying and buying and buying and buying and buying and buying.....until I eventually show a profit. Now I agree with you here, that would be stupid.

  9. I see. So 4 losses instead of 2 wins, with one being a very nice one, is the preferred method? My God, you guys are clueless.

  10. Trading is all about "risking a little for a chance to make significantly more... over and over again".

    If no stops are used, you've lost the "risk a little" aspect. Eventually, that will destroy you. And it only takes once or twice to undo 20 years worth of gains, and worse...

    If you can't accept that, why don't you just send me half of your trading capital and spend the other half on hookers and cheese... we'll both be better off...
    #10     Jul 24, 2008