The stoploss

Discussion in 'Psychology' started by travis, Nov 28, 2002.

  1. travis


    In order to be profitable, you have to pick the best possible trades, but you also have to make sure you don't lose everything on those "few" trades that prove to be wrong. That's why you need the stoploss.

    The stoploss implies that after all your thinking before starting a trade, when you are so confident that it will be successful and you are right about to make it, you still take the time to ask yourself "Ok, what if I am wrong? How much am I going to lose at the most from this trade if I turn out to be wrong?" And it's a very unnatural thing to do, because you waited all this time for the perfect trade, are positive about it, and you are there asking yourself "how much am I willing to lose on this trade?". Instead of thinking positive, you are being negative, pessimistic. That's why it's so hard to learn the habit of using a stoploss, because it's hard to consider the possibility of being wrong, when you think you are right. You think you are right, because if you didn't think so you would not be making the trade. You are positive about the can you think of a stoploss when you are about to make a trade?

    But it's necessary, because, similarly, for psychological reasons, many of us have a hard time exiting a trade that is showing a loss, and you need a stoploss to do that for you. Why do you think that happens? Once you realize that you are wrong, why is it so hard to exit a trade you entered thinking you were right? Maybe we don't want to admit we are wrong? Why not? Maybe it's too hard on our self-esteem?

    The reasoning that goes on for my trades without a stoploss is always this: first I enter a trade, then it shows me a loss of 1%, so I decide to wait, because "why sell if I felt so confident just a minute ago?". Then it shows you a loss of 2%, and you start to realize it might be a mistake, but if you sell now you'll lose 2%. Then it's -3%, and you think that, as soon as it will come back a little, you'll close the trade, but it doesn't, and so on, until the end of the day, when you sell at -20%, and that would still be a stoploss, because I am sure many people even keep a losing trade open for days and months, like unexperienced investors do with their stocks that show them a loss. The only way to avoid this paralysis that happens to you when your loss begins to develop and increase, is to let the stoploss close the trade for you.

    What is your experience with the stoploss? Do you all use it, and how? Did you use it from the beginning, or only later realized that you were missing something?
  2. It all depends. I like trades that don't require a stop loss. Like buying short term OTM options. Or buying a few hundred LU for .75
  3. Funster


    I have the exact opposite problem. I have no problem taking the loss immediately it turns sour. Unfortunately this has not done me any good so far as I get chopped to death in anything but the most strong trending markets!

  4. travis


    Then you don't use moving averages for your entries. If you use ma for example for an intraday trade, you enter the trade when it gets crossed one way, and exit when the ma gets crossed the opposite way by the index. Once you find a good moving average, and enter/exit when it tells you to, you'll have statistics on your side, whether on a daily basis or on an intraday frame.

    You probably enter too soon. Moving averages will solve that problem. My problem instead is that I don't exit the trade when the moving average gets crossed again (in the opposite direction), so I need a stoploss much higher than where there would be an exit signal, to stop me out, just in case I don't follow the signal and stick with a losing trade.

    For example, you can use a moving average on a daily basis, and, when the trend ends and you have a trading range, you can use a moving average to make intraday trades.
  5. Every trade is closed at a LOST, even if the trade is a winner..

    if you can't manage to buy at the low and sell at the exact high,

    then every trade is a LOSER...

    once you are in a trade...your entryprice has nothing to do with

    the trade anymore...your profits are part of your equity and this

    is why there is no every trade is a loser..

    Thinking in this manner has help me save so much money...

    the next most important thing is to think of each trade as a coin

    flip, I don't even waste time doing analysis anymore...

    It doesn't matter at matter how much anaysis you do

    there is a 50% chance you are going to be wrong...

    believe me..if you integrate this idea into your belief system

    you will never have a problem taking a loss anymore..

    because your ego is no longer involve..

    of's easier said than done..

    which is why I recommend everyone to go systematic..

    forget discretionary trading...99% of people is not cut for it..
  6. travis


    I agree with the concept of seeing it in terms of probability, and in terms of a bet, but not with the idea that you have a 50% chance of being right. You have a very high probability that it will go in your direction when you make the trade (that's why you make the trade), and a smaller probability that it will go in your direction long enough to cover commissions and slippage. And you have a less than 50% probability that it will go in your direction for exactly as much as you hope it will. That's the way I see it, as far as my experience goes.
  7. anima


    I set stop losses only if I'm going to be away. To me, they are a crutch. People set them because they don't have the discipline to admit they were wrong. Instead of relying on this crutch, I think one should try to improve their discipline and exit the trade based on an objective analysis of the situation.

    I have to admit though, there have been times when I wish I had a stop-loss in place. But, then again, there are also times when I am glad I didn't.