Kreslik.com - traders community since 2006

Hello,

TheRumpledOne dropped us a line with the following link on the Yahoo forums:
http://profitwaves.com/Stop_Loss_Orders.htm

The article deals with the question whether or not to use the traditional stop losses and offers alternative "scientific" way to place them. Alas, the article is quite confusing in a number of ways:

1. it is technically impossible to trade without the stop losses. Why? Since you always employ the last resort stop loss in the form of the trading account margin call. While I hope no one on this forum would advocate such a style of "trading" when the only stop loss employed is a margin call, let's just pretend for now that there is such a "trader" and that he does not employ any other sort of stop loss and relies on his large bank roll. Obviously, the larger the account and the smaller the position, the higher is the probability that he won't get stopped out due to the margin call. The problem is that this probability is always less than 100%, so eventually, he will get stopped out by a margin call, there's no avoiding it. The only way to not being stopped by a margin call is to use an infinite amount of capital, which, by nature, is impossible. Thus, you always are trading with a stop loss.

2. the author of the article does not say that he would recommend trading without the stop losses altogether, he only suggests to use some alternative ways to place the stop losses. So the article is in fact not about trading without stops, but rather about the way how to place the stops.

3. I agree with the author that it is no good using the arbitrary style of stop losses, based on your personal risk tolerance with no respect to the particular trading system. But the author doesn't suggest any alternative objective, non-arbitrary method of placing the stops.

4. in the article, the author says, quote:

Now then, you now have an effective, objective, scientific way of measuring whether or not your trade has broken down. When you draw a trendline as indicated here, you will know at what level you need to sell your stock. That is, when the trendline has broken.

[align=center][/align]
(The above image is reposted from the original article)

Placing stops above/below the trendline might be considered scientific only if the trendline is calculated automatically based on some objective formula. Placing stops above/below the "seasoned eye drawn" trendline has got nothing to do with any science at all. The author of the above article doesn't give any idea whether the trendline drawn on the picture was calculated automatically or with a "trained eye" approach, so I assume that it was not calculated automatically.

Conclusion: for me, the article is just plain rambling and brings nothing new.

Michal,
In the above post, it was suggested that one, "Consider a trendline ... broken...when at least two candles close close (I think he meant "below" in his illustration for a sell) the trendline...! This is a definite stop loss.
Otherwise your comments are well thought out.
Thanks,
Jay

Mathemagician commented that actually there is indeed one special case in which the trade can be held without any stops:

Mathemagician wrote:#1 is only true if leverage is used or the trader is short. For unleveraged long positions, no margin calls can be generated and the trade can be held for an arbitrary length of time.

jj

Hello Michael,

I did not gain much from that article either. My method for stop loss placement is somewhat arbitrary as I rely on fib numbers to determine an amount in cents from entry signal. Note that my timeframe is very short. Typically if there is decay in an entry premise shouldn't that determine exit...of course a maximum threshold not withstanding. Then if you are "stopped" often perhaps the entry method should be re-evaluated. Any thoughts on that? Dan

Dan,

I can't possibly comment on arbitrary stop placing. I am a heart and soul system trader and won't ever place a single order without prior proper backtesting it and knowing it is profitable in the long run.

If you want to help with coding any tangible rule-based ideas on how to place a stop, then I'm game, though

The whole problem with stoploss orders lie in the fact that if marketmakers/specialists see a number of orders around a certain price range, you are going to get stopped out period.

This will happen in spite of support and resistance levels because those orders are primarly what comprise these levels and for the MM/spec it is too easy for them to pass up motherlodes of shares/contracts at a cheap price when they were planning on running the equity up in the first place.

It is my practice to place stops mentally and if I must use hard stops, I place them only at less obvious price levels.

Thank you both for that personal insight. There are many methods indeed. I will revisit this exit placement issue again as time permits. Are you both satisfied with how your stops are working for you.....that is perhaps the better question and aftre all what matters most. What do you feel are the strongest and weakest elements of your own method? Dan

Am I completely satisfied with my own methods? yes and no. They tend to work for me more than they don't but I know there is always a better method out there (even if it's buying at the absolute bottom and not worrying about a stop ).

The weakness in my method is on behalf of the indian and not the arrow. Like all aspects of trading, soft stops require discipline and more so in the fact that you have a tendency to let your position ride beyond where the hard stop would be placed. The benefits come however when you see a position ride to within 1 point of your stop and then it doesn't get set off because the specialist or marketmaker doesn't know it exists.

I suppose that any method of choosing your stop loss order is good enough so long as it generates profits for you.

Funny, I learned NEMO doesn't trade with exits of any kind, be it stop-losses or whatever. He just trades the futures fully automated with stunning success I might add. There's always an unorthodox trader or two that does it his/her own way.

-OPTIONSWINGS

Until that dreary day when the planets are aligned, the power surges, our positions are long, and some news breaks the negative limit for 5 days straight.... Not pessimistic, just realistic