Stops - do you want them?

d08 · Sep 14, 2010

I only go with something that is supported by backtesting. It's very likely that I'm just bad at using stops but I've tested the simple percentage stops as well as most of the complex trailing stops (for example Chuck LeBeau's work). I have huge losers in my backtests but the logic is - if I get a 20% drop then it's roughly a 75% chance it will recover right away, meaning stops do more harm than good. Anyway, if stops work for you...use them!

Buy1Sell2 · Jul 8, 2011

Quote from lurefo:

There are many ways to add a Stop Loss element to a strategy. Maybe that's one of the reasons you didn't get satisfying results in backtest. Personnaly I use more than one strategy, and I found that a dynamic - as opposed to a static - stop loss approach does a very good job.

No offense, but I don't see how that argument can be used to continue not using stops. Just because the market bounced back up favoring your "no stop" scenario doesn't mean it will do it as well next time( or at least not so quickly).

IMO, you fall in either the first or second category of the traders who use no stop that I listed in an previous post - correct me if I'm wrong....

Good trading!

Ok I see the folks that advocate not using stops are mostly saying they're using size management, bigger margins, basically less leverage. Here is why I think this is inferior (B1S2 that one is for you) to trading with stops :

1) Some of the guys that use little leverage or no leverage at all and have survived the flash crash on the long side seem to use that as an argument to justify having no stop. Well if studying the history of the markets has taught us one thing it is definitely that basing one's risk strategy on past price movements/volatility is a mistake. Strangely, the markets like to suprise us with price movements, jumps in volatility and behaviors that were never experienced before. So ... next time the S&P goes limit down and re-opens at 500. Little leverage guy with no stop with 1ES car per every 25K survived the 100 pts flash crash drop thinking the worse is over. Well this time, different story: our man is wiped out.

2) If a 25, 50% or more drop in the market against your position doesn't scare you then in my opinion you are way underleveraged, or you're facing volume constraints in a thin market... If we ignore the later option, that's not trading at its best, that's more investing. Wich is fine btw, I'm not saying that one is better than the other, but that is just not good trading to me. As traders I think we must maximize returns by making good use of the available leverage within the limits of our strategy's drawdowns and you can't sanely use aggressive leverage if you have no stop. In that sense, that seems inferior to me.

3) There are different ways to skin the cat but for many traders, trades are invalidated once a condition is met (price area is touched/broken or a certain indicator crosses XYZ, etc). The logic wants to get out or as others suggest to hedge (options, other instrument, etc...). In any case it seems to me that having no stop does not fit at all with this type of trading.
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Stops are definitely the way to minimize losses and extend gains. Totally agree that not using stops is inferior.

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Stops - do you want them?

d08

Buy1Sell2