I think stops should rarely be used. I can't recall ever using as stop in all my years of trading. I think i did a few times, but can not remember when or why. Stops i think are not a statistical edge unless they can be configured to be used in conjunction with multiple indicators beyond just 1 dimmensional price.
Unscientific though it may be, quite often that is precisely what happens as Bitstream mentioned. The heat gets too much to bear, you bail, and then surprise, price turns around and goes back up. As to doubling down, I've seen it work too many times to completely dismiss it out of hand. Yet I am strongly constrained and mightily impressed by the number of top traders who say NEVER EVER average down, so I don't do it anymore, but many a time would have done well to do so. Also, isn't it a fine distinction between a) holding already shares bought at a higher price, but then buying in more of that share because one felt it was undervalued and due for a recovery, and 2) not holding any shares of that company, but then buying in because it seemed undervalued and due for a possible recovery? Scenario (2) would be good trading, but scenario (1) would be averaging down or catching the falling dagger, yet are the two scenarios really that different? Okay, so we botched up the first time and held on to the shares that should probably have been cleared at a higher price, but does comitting this error then have to preclude us from picking up more of the same shares if it was now an attractive proposition at the current price?
The problem with doubling down is not with the specific trade you are doubling down on(assuming you do not blow out!!!). It is the fact that you are changing you trading style because of one trade that got away from you. Trading is a game of averages over a large amount of trades. When you give up your rhythm it is difficult to get it back. Now if you already have a plan in place that includes adding to a losing trade that is a different story. Then you are actually following your trading plan.
Yes, trading is such a fluid and unstructured thing that one needs to be as clear as possible as to what is one's plan in going into a trade. As mentioned by one of the others, when we hold on, we go from being a trader to becoming an investor. Or at least from being a short term trader to an intermediate term trader. As a matter of practice, it is probably not a good idea, but sometimes can give good results in the end. From a psychological point of view, it certainly looks like anytime we are controlled by greed or fear, chances are our move will be wrong. When we are most afraid, it is usually the time to tough it out (who knows, even double up), and when we are most optimistic should be the time to get out perhaps? Anyone concur with this stupid notion?
u can interpret it differently; u try to double up only when/if u can't bear it no more and if it works u keep on doin' therefore makin' it part of your plan. still, if u place a tight hard stop on the whole pos after martingalin' it's not that u gonna go broke innit. disclosure; i have no clue how effective it can be.
i don't think that technique is going to work with this trader. he just needs to realize that his PROTECTIVE STOPS are his friends, honor them, take the little bitty hit that they represent to his overall portfolio, and come back another day. if you do this, and you have a decent system, i promise you will never go broke, blow your account, or bankrupt from trading ... while any of those things could happen if don't.
Could not agree more. If you trade a system that you have tested/optimized, with clear rules, including stops, then not respecting your stops (I am using time stops for my swing tades) just shows lack of discipline. It might work out a few times, but more often than not, it is a losing proposition.