Below solid proof of the most basic concept of trading. You need to distinguish the difference between an exit that has been ordered by a valid signal and your concept of an Stop Loss which is based on your risk tolerance and not following your own system or not having a system in the first place is causing you to realize predetermined amount of loss. In other words and in plain logic, Predetermined Loss is an Stop Loss(as in your case(saying OK enough, I canât stand the loss anymore)) whereas ours is a change of strategyâ¦! We go from long/short to neutral or reverse because our strategies ordered so, OK? Which part of this is a Stop Loss? Furthermore, we do that regardless of winning or losing. See? We engage in fully executing our strategy regardless of if it has generated losses or gains?!!! Vs. drawing an imaginary line below or above our entry point saying OK that is how much we want to lose on this trade! UNDERSTAND, an strategy is BLIND to gains or losses, it has a road map and it follows it based on existence or lack of existence of certain patterns and NEVER based on the gains or losses.
The concept hasn't become more complex since my last post! Of course system doesn't "know" when there is a loss or a profit, but simply the case when you have signals to go flat or reverse the directional trade, actually IS a stop-loss when this trade happens to show a paper loss. It's OK way to manage risk, but here arises one tricky question: what if your system NEVER gives you and opposite signal and it just happens so that it is a losing trade? That is why I insist that your kind of a stop-loss is inferior to PREDEFINED, BUT LOGICAL STOP-LOSS. Such stop has nothing to do with $$ risk tolerance, it's position size which is relevant to risk tolerance, not point of exiting, BUT this stop-loss has one huge advantage: when odds are no more in your favor, you're out IMMEDIATELY and you have no risk of crashing your risk/reward. Such kind of stop-loss takes place, when you trade setups which IN ADVANCE give you a point where they more likely have failed than not and use that point as a stop-loss or stop-reverse. Such trading has way more potential that those "advanced" ways which many advocate simply because they can't or even just don't want to invest their time in grasping simple concepts of "classic" directional trading. How do you think, why most really successful directional traders used and use this simple risk-limiting strategy instead of "advanced" ways like hedging, waiting for opposite signal et cetera? Because simple stuff makes more money... The rest in your thread, as it's more relevant to it.
If you read between the lines, this has been a very illuminating thread. Not so much in terms of hard facts or empirical data about the value of fixed stops, but about the mindset of individual traders and their attachment (or lack of) to the notion of using them. As a fully discretionay daytrader of futures, I have a different take. For me, it has been absolutely essential to give up on small, pre-defined stops (I always use disaster stops that virtually never get hit). It has been just as essential to avoid fixed profit targets. Now, if you trade like me, scaling in/out of postions and trying to either re-enter a trend or spot a true reversal, fixed stops are a disaster. I'll grab a few ticks real fast sometimes, depending on price action. Other times I KNOW I nailed the breakout or reversal or whatever so I'll let the trade run longer. Too many times in the past, I have been noised out of what would have been a great trade had I not got whacked by a "tight" fixed stop. At the same time, I don't want to get too married to a loser and do big damage to my account. By design, when you scale in, you are often "adding to losers". Sometimes, the most likely piker stop point is actually the place to double or triple up if you are on the right side of the trend. The only answer for me has been a Daily Stop Loss Limit. It may take me only 1 trade to hit it, or many. It depends on how much I loaded the boat on each trade and how well my hit rate is going for the day. But as a person who scales in/out, it is all about at the end of the day having my average buy price be lower than my average sell price by at least a few ticks, with enough contracts run through the session to make a nice profit after expenses. Has anyone noticed that small fixed stops work better on yesterday's chart than they do in live trading?
Not me definetely. if there is a print beyond the stop point, it doesn't matter was it in hindsight or realtime. It was a valid point to get out. BTW, thats the beauty of it - absolute objectivity. So if it goes just 1-2 ticks beyond my predefined point of failure, I'm automatically out. This point can be moved closer to entry, but never away from it and is entered together with entry order. And I absolutely don't care if it goes back or not. We act in the realm of probabilites, not certainty, so when there is a slightest sign of odds being not anymore in favor of the trade - no reason to hold it for more.
See, this is exactly what I meant. Here is a person who uses set stops and uses "a tick or two" as violation of his trade criteria. In my style, I use a range of several points to determine support/resistance and need to be convinced by a tend change or range breakout against me. If a support or resistance or trendline level gets solidly breached with the right price action, follow through and volume, then I have to admit I am wrong and take my lumps. Then I look to scale out with minimal damage and scale in to the other direction. Otherwise, if I am on the right side of the trend, which is most of the time because true reversals don't happen that often, it turns out that a loss from a small fixed stop would have been incorrect to take. And yes, a person can re-enter the same trade after getting stopped out but it is usually at a worse average price. I'd be willing to bet that his avg. loss is smaller but he takes a higher percentage of them than I do. And that I take a smaller percentage of losses but they are bigger. Since his style is the polar opposite of how I trade, I could not say his thinking or trading action is "wrong". But I spend a lot of my trading day waiting for his tight fixed stops to get hit so I know when to add to my position by watching the low volume, unsustainable spike created by the tight stops getting hit and using them as a way to improve my avg. price. LOL
slapshot: certainly there is no "wrong" way to trade (assuming of course that we compare overall profitable trading approaches ). As for me, I simply adopted what I have read about the best outright traders in history (Livermore comes to mind first) and what I was taught by the most successful traders I had a pleasure to talk with... So just decided not to reinvent the wheel and use what I know very successful people already use...