Stops - do you want them?

hi I am not talking about the order type "stop", in fact, i am just buying and selling and the broker doesnot know at all I am stopping.

 

What you have then is a stop implemented out of the market.

In that case you need to look VERY closely at your slippage assumptions in you backtest. Because all stops slip, but stops that are implemented out of the market slip worse.

In general, stops should be implemented in the market unless either

1) the position the stop has to close is too big to handle in a single market order

or

2) the exchange in question exposes the "dark" side of the order book to some traders either for a fee or as part of special market making privileges.

 

Protective stops are to traders what safety nets are to trapeze artists. Only trapeze artists who can't fly should use safety nets.

 

Before you start worrying about stops you should ask yourself if a Sharpe Ratio of 1.52 is different from 1.50 from a statistical perspective. Combine that with the fact that most systematic strategies produce Sharpes during actual trading that are much lower than backtested Sharpes (0.2-0.5 lower in my experience) and I think you are not focusing on the right issues.

 

Stops only work if you are can pick winning trades, they are sort of insurance that if something unexpected happens, you are protected.
If you are not consistently picking winning stocks, stops will loose you money.

Try to practice http://www.turtrades.com (free) historical trading with stops and without, you can fast forward after your order has been executed to see if your stop helped your or hurt you.

 

You're special.

 

Only two types of traders don't use stops:

1. The extremely lucky.

2. Dopes.

 

This seems like a strategy that works until it doesn't just that one time. Pleas correct me if I'm wrong. lescor also has 50% DDs. If this were to happen in the beginning, it would be pretty tough to recover from.

 

Not using stops is for traders with infinite capital. If your capital is less than infinity, you need to use stops.

 

You're wrong. I've never had a drawdown even close to 50%. And I do use stops, just not all the time, and it varies how they are implemented and managed.