"Truths about stop-losses that nobody wants to believe" - 16 February 2015 http://www.quant-investing.com/blog...bout-stop-losses-that-nobody-wants-to-believe
Absolutely true. Assume you're trading equities and risking 10% of your equity per trade for a short term trade, realistically you could lose 50-70% which is only 5-7% of your account. Theoretical loss would be 100% of course but that's still only 10% of the account. Using stops entirely depends on what strategy you are trading, your time-frame, your instrument and risk tolerance. There is no one-method-fits-all in the trading world. People who preach universal truths have usually limited trading experience. This debate can go on forever because each group is arguing with examples using their trading preferences.
No. Generally it will degrade system performance. But I'm talking of a system where strategies get applied should the value of the position drop, ie. roughly comparable to applying zero-delta-hedging with options. In that case no stop loss gets used, the sole aim is rather fixated only on reaching the target stop. By this method, if time wouldn't be a limiting factor, then one never would make a loss under normal market conditions. But time is a limiting factor, so sometimes losses are unavoidable, but it is limited due to the "implicit hedging" mechanism (like is the case with zero-delta; the loss is just the delta difference to the last zero-delta, so to say... ). ("target stop" here means "profit stop")
I must admit a lot of Marketsurfer's entries were strange (timing wise), hence a majority of posters that perhaps understand price action in much more detail kept bringing a subject of fading his calls. Maybe whenever a trader dedicates his time to analyse price action, instead of ignoring and disrespecting it, his results using fixed stops, which occasionally could have the benefit of being close to entry, will provide a different outcome to results achieved by Marketsurfer. After all, if you aren't good at seeing when not to enter a trade how can you expect a positive result to a test. It's like telling an average driver to race an F1 race car trying to match lap time of pro drivers - not gonna happen.
Another stupid general response. No, stops in all scenarios do not enhance performance. Example: Imagine you're trading equities and your exits trigger in the first 10 minutes, spreads during this time even for normally quite liquid issues are huge, that means you would lose at least 1-2% simply on the spread. Using STP LMT could be an improvement but would most likely result in a non-execution. Also, during high market volatility, spreads go very wide and you will lose a lot in execution. This also includes most futures contracts. Thank you for your time.
This is what Marketsurfer's ideology is all about. Be the first to call a top, be the first to call a bottom. That's what journalists earn points for - I told you so! So his findings are most likely based on catching tops & bottoms. Security keeps climbing, he sells it, a stop is used and BOOM! Stop loss triggered. Security is falling, he buys it, a stop is used and BOOM! Stop loss triggered. Let's do that again... Needless to say that catching tops & bottoms requires information, vision & skill. It's evident, beyond any counter argument, that Marketsurfer does not have the necessary skills, that is exactly the reason for scaling into his trades. I do not doubt him being a visionary. But as a trader he lacks a vital component - skills. I am more than certain that I can beat him in a trading contest based on NOT scaling in and having a fixed stop. I know this, because I am aware of his disregard for price action and it's attributes.