No Free Lunch

Discussion in 'Trading' started by monee, Oct 24, 2003.

  1. monee

    monee

    As one reduces the width of their stops the size of their losers obviously decreases.

    But as one increases the width of their stops their win/loss ratio increases.

    My feeling is if you are generally correct on the mkt direction the wider stop is better.

    Would like to hear others views on the subject.
     
  2. T-REX

    T-REX


    Thats what I've been saying all along.:)

    It works for me.
    I hardley ever get stopped out of a trade prematurely.:D

    http://www.elitetrader.com/vb/showthread.php?s=&threadid=21684&perpage=6&pagenumber=79

    This chart was a great example!
     
  3. I answered something like that in the past :D
    http://www.elitetrader.com/vb/showthread.php?s=&postid=212261&highlight=capability#post212261

    I explained above that these numbers are just measures. What you will do with them will depend on your own system. But as for stops what I want to explain is that one of the frequent reason s novices lose is that their stop is too tight compared to the CAPABILITY of THEIR system (so I don't mean for ALL systems for example the possible best system of the world of Mr Profit ). Usually it can be that they don't have enough capital so they put a stop that is too tight compared to what their system would require.

    I have already introduced the capability concept of a system but I have only done it once so I will do it again. As often the concept I cite comes from Quality Engineering field. One of the greatest advance in industry was to make a move concept from specification to tolerance by understanding that it is not enough to have specifications but that specifications must suit realities. If in real your system has an intrinsic capability of x0 you can't get x < x0 this is just wishfull thinking like praying god ! So the term too tight means that it is relative. I give the capability of the market not of anybody's trading system since I don't know it. But the anybody's trading system capability will most likely depend on market's system capability itself.


     
  4. Looking back, I have a decent hit rate with tight stops....so maybe I should loosen the stops to get an even better hit rate :)

    -Fast
     
  5. As for my system I can often use very tight stop in break zone as it can be as low as 2 absolute points of Dow - but I consider on spot not on future (because future is too fuzzy so that there I will use a loose mechanical stop on future and would trigger the real stop manually when the one on spot is reached). Now a lazy stop of 20 or 30 points has the advantage of not having any headache :D (typically at bottom because I don't want to miss it as today see http://www.elitetrader.com/vb/showthread.php?s=&threadid=23730&perpage=6&pagenumber=3). I consider that lazy relative to my system, others could use much larger stop for example 69 points stop as you can read here:
    http://www.nationalfutures.com/Mini_Dow.htm
    "For Thursday look for a rally near 9670 to go short on use 9739 stop "
    (We never rally to 9670 so that's a bad example but that's the latest page available today :D).

     
  6. Agree.

    I just crunch the numbers with all possible reasonable stop sizes
    and let the market decide what is the best
    stop size for any given system.

    peace

    axeman
     
  7. 2 points is really tight since the "intrinsec capability" is estimated to be 4 points on 1 minute scale see http://www.elitetrader.com/vb/showthread.php?s=&threadid=14574&perpage=6&pagenumber=1
    <IMG SRC=http://www.elitetrader.com/vb/attachment.php?s=&postid=212051>
     
  8. funky

    funky

    my stops tend to be VERY loose until a particular event happens. then my stops are placed fairly close. but all that i am doing is positioning myself for the next (reversed) trade.

    the longer you stay in this game, the better you will get at 'placing' your stops. remember, a stop should really be like a safety in football. you don't want the safety to be too close, cause guess who is gonna see if they can run past you? the traders directly above you in the food chain will have your stop for lunch.

    in my experience so far as a trader, its better to be late in your reversal or exit, than to have your stop gunned. it really messes things up.

     
  9. how often will a resting stop loss order in the limit book be 'gunned' down?

    i often hear about how specialists/MM/experienced traders deliberately drive the stock price enough to hit the stop and then pick up shares on the cheap

    for larger cap stocks this is not much of a problem because of the limit book has depth?

    thoughts?
     
  10. I place my stops in sup/res areas... so if they are hit, obviously I was wrong. Which is usually a reversal signal, but sometimes it rebounds and I am out with a loss and no open positions.... just time to wait for new signals. These areas are quite wide in respect, but often gives me good reliability.

    I am working on a 2nd system... an entry that will get me in sooner, which will actually be a tighter stop. Not for the purpose of increasing my reliability, but to increase my profit/loss ratio... which is mainly a result of exit strategy though.

    But I guess it depends on strategy... I suppose a scalper would want tighter stops, but I am in for larger moves, so my stops are larger....

    Andy
     
    #10     Oct 24, 2003