[es] Stop Losses: Help or Hindrance?

[AuctionMarket_Trader 10]

I personally do not use stop losses instead i manage my position (however i typically have a 10 point crash stop which i have yet to take once). I think this is a big fallacy in the industry and one of the reason why over 90% fail ... just wanted to hear everyone thoughts....

[MightyMouse 12]

I never trade futures without a stop. The stop size is a function of the size of the account, the type of trade, and your tolerance for pain.

 

When I do get stopped out, which is frequently, I have no bones about getting back in. A lot of times it would have been better if I had not had a stop because I take a loss get in at a worse price from my original entry plus the loss. Other times it is a saving grace and I can laugh because I was completely wrong and would have gotten killed if I let price go all the way to what I deem to be support or resistance, but I got out with a small loss. Then there are other times when I enter and price just screams and it wouldn't have mattered if my stop was 1 tick or 100 ticks away because I got it right.

 

Gains are not going to kill me. Losses combined with an extra dose of bad luck will kill me. Using stops gives me ultimate control over whether I live or die.

[Tams 20]

the fool and his money shall soon depart.

 

someone said that... don't remember who.

[electroniclocal 10]

Wrongly placed stops are one of the main causes of traders' losses. A drop dead stop is a must and I calculate mine by backtesting. However, a back tested stop is not appropriate for every trade as every trade is different eg context and volatility. So my drop dead stop means that this is where I exit come what may. In practice, I stop myself out when market activity tells me I am wrong. When i enter a trade, I have my generic stop and targets triggered by my software. I then manage each trade, moving both stops and targets to where they belong in that specific trade.

[TheNegotiator 13]

I agree with el here. So many times I've seen traders put stops in silly places and inevitably get stopped out on what turns out to be a great trade. Not infrequently, you get stopped out to the tick. I don't think this is coincidence either as if you think about it, if it turns out to be a good trade, it's just the traders who are in the red on the trade who are exiting and not new trades being placed. So being stopped to the tick or close to that is not surprising imo.

 

The most important thing about stops though and why they can be a real hinderance is poor entry position. Not waiting for the optimal entry position for your technique due to lack of market awareness in general or lack of focus on the market, or just inexperience has the potential to stop you out before you even enter the trade. I know people have written that actually entries don't necessarily matter in the long run, but if you find yourself being stopped out a lot(so long as you're not trading with a single tick stop or something silly) before the market turns and goes in the direction you'd hoped, take a look at those entries. Think about it. Most traders risk a maximum percentage of their account on each trade. If you enter in the wrong place or on the wrong swing, you end up messing up your r:r by changing the size of your trade so that you can afford to get stopped out where you are wrong as well as within your account parameters or you get stopped out before you are wrong.

[tradeemini500 10]

I always trade with a stop. I believe there has to be a point where you admit you were wrong on this particular trade/idea and you move on to the next trade. Where you put your stop is another story/another post, but I couldn't imagine trading without a stop loss.

Edited May 8, 2011 by TheNegotiator

[MightyMouse 12]

Wrongly placed stops are one of the main causes of traders' losses. A drop dead stop is a must and I calculate mine by backtesting. However, a back tested stop is not appropriate for every trade as every trade is different eg context and volatility. So my drop dead stop means that this is where I exit come what may. In practice, I stop myself out when market activity tells me I am wrong. When i enter a trade, I have my generic stop and targets triggered by my software. I then manage each trade, moving both stops and targets to where they belong in that specific trade.

 

What is a wrongly placed stop? Is it one that is too close or one that is too far?

[johnw 10]

What is a wrongly placed stop? Is it one that is too close or one that is too far?

 

1 ...It is a stop placed with no thought given to the direction and strength of the upcoming momentum.

 

2 ...It is a stop that is carefully hidden in an obvious place

 

# 1 will negate # 2

Edited May 8, 2011 by johnw

[MightyMouse 12]

1 ...It is a stop placed with not thought given to the direction and strength of the upcoming momentum.

 

2 ...It is a stop that is carefully hidden in an obvious place

 

# 1 will negate # 2

 

Does anyone actually place a stop that is either 1 or 2 if they know what they are doing?

[johnw 10]

Does anyone actually place a stop that is either 1 or 2 if they know what they are doing?

 

I am obliged to believe that ALL Posters are operating to their fullest extent of "knowing what they are doing"

 

IF they are growing their competence then "knowing what they are doing" will grow with them.

And this is the second part of obligation to belief that I hold.

[AuctionMarket_Trader 10]

The point of this post was to exploit and necessity of a hard stop if you truly understand how you market work In my case ES which is dominated by probes and rotations you can easily avoid having hard stops but that doesn't mean not taking losses lol I am not saying don't take losses im saying don't have hard stop because most of the time you will have the chance to be able to get out for less that what you stop was if you understand the market your in.

[TheNegotiator 13]

The point of this post was to exploit and necessity of a hard stop if you truly understand how you market work In my case ES which is dominated by probes and rotations you can easily avoid having hard stops but that doesn't mean not taking losses lol I am not saying don't take losses im saying don't have hard stop because most of the time you will have the chance to be able to get out for less that what you stop was if you understand the market your in.

 

Then it makes very little difference to me. If you have a plan and an exit point then trade it manually or with a stop market/limit order. You are at your most objective before you enter a trade so changing the defined losing exit mid trade isn't something that should be done lightly. Probes and rotations should be taken account of pre-trade surely? Is this more of what you were discussing or are you talking about the mechanics of stops such as slippage? (surely not in ES)

[cw30000 10]

You must have stop if you trade. The reason is simple, one flash crash will wipe out your account, you may even have a negative balance.

 

If your entry is correct, then the chance of you stop getting run over is slim. If you do get stop out constantly, chance are that you have misreaded the market.

 

Sent from my PC36100 using Tapatalk

[SIUYA 11]

"What is a wrongly placed stop? Is it one that is too close or one that is too far?"

 

Often its not close enough,

plus for my two cents - if you are going for pin point stops, what is often more important is that you make sure you have a good way of ensuring you get on the move you were looking for even after a few quick losses. Taking three 5 tick losses, to then miss the 50 tick move can hurt. Ideally you wont take a loss while trying to get on, but this is not the case in reality.

[MightyMouse 12]

"What is a wrongly placed stop? Is it one that is too close or one that is too far?"

 

Often its not close enough,

plus for my two cents - if you are going for pin point stops, what is often more important is that you make sure you have a good way of ensuring you get on the move you were looking for even after a few quick losses. Taking three 5 tick losses, to then miss the 50 tick move can hurt. Ideally you wont take a loss while trying to get on, but this is not the case in reality.

 

I asked the question because you can only know if a stop was wrongly placed after the fact; meaning, when it stops you out. Thinking that there is a right and wrong stop based on structure is the equivalent to thinking that the structure you see is the only structure that matters, and if you are looking at the only structure that matters then you are looking at the holy grail. Since we know there is no holy grail then we know that the structure that you are looking at is not the only structure that matters and therefore there is no stop that is too close or too far based on structure.

 

On the other hand the things you do know are how much you feel like losing and possibly how much pain you feel like feeling.

 

Minimizing losses, which are trading costs, is a major part of maximizing trading profits, so the topic is a very important topic to discuss.

 

MM

[Tradewinds 12]

You must have stop if you trade. The reason is simple, one flash crash will wipe out your account,

 

If one flash crash could wipe out your account, that would mean you are highly leveraged and trading every penny you could trade. I don't see how a flash crash could wipe out your account if that wasn't true.

 

The other issue is how the trade is being monitored. If there is a flash crash, and you are right there watching it, then you could just hit "flat" and exit.

 

So, at the very least, there are 3 issues here:

 

• Leverage
  
• Amount being risked relative to account size
  
• How the trade is being monitered
  

[SIUYA 11]

I asked the question because you can only know if a stop was wrongly placed after the fact; meaning, when it stops you out. Thinking that there is a right and wrong stop based on structure is the equivalent to thinking that the structure you see is the only structure that matters, and if you are looking at the only structure that matters then you are looking at the holy grail. Since we know there is no holy grail then we know that the structure that you are looking at is not the only structure that matters and therefore there is no stop that is too close or too far based on structure.

 

On the other hand the things you do know are how much you feel like losing and possibly how much pain you feel like feeling.

 

Minimizing losses, which are trading costs, is a major part of maximizing trading profits, so the topic is a very important topic to discuss.

 

MM

 

I am not sure if we agree or disagree here I actually was trying to add to your comment, and was trying to make the point that really close stops are often underestimated if watching a market closely - stops are all part of the structure you are looking at, the market does not know or care what you are thinking, but it becomes semantics about stops being in the right place or not.....maybe the question is of weather the stop was poorly placed.

Stops are designed to minimise losses. period. They cannot really be in the wrong place.

 

Where you place them should be based on the structure/timeframe/mindset/plan you are trading......otherwise you may as well flip coins.

 

I would say the only time a stop is wrong is when it is not kept.

(end of mindless ramble for the afternoon)

Edited May 9, 2011 by SIUYA

[steve46 12]

I asked the question because you can only know if a stop was wrongly placed after the fact; meaning, when it stops you out. Thinking that there is a right and wrong stop based on structure is the equivalent to thinking that the structure you see is the only structure that matters, and if you are looking at the only structure that matters then you are looking at the holy grail. Since we know there is no holy grail then we know that the structure that you are looking at is not the only structure that matters and therefore there is no stop that is too close or too far based on structure.

 

On the other hand the things you do know are how much you feel like losing and possibly how much pain you feel like feeling.

 

Minimizing losses, which are trading costs, is a major part of maximizing trading profits, so the topic is a very important topic to discuss.

 

MM

 

This is the "logic" that I often hear from those who haven't taken the time to adequately test their own systems, or from those who have insufficient experience in a market.

If you know what you are doing you can corellate stop placement with volatility, that way on an individual trade basis you can minimize the cost of being wrong and on a systemwide basis (over a period of months for example) you can keep risk down to a point where you know that profit will always exceed expenses.

For individual trades I know where I am wrong because "being wrong" corresponds to a boundary of my supply or demand node. Once price closes above or below a "node" the reason for being in the trade is invalidated and I have to pay up.

On a systemwide basis, I can allow myself to be wrong a specific number of times per day, week and month...once I use up those "bullets" I'm done. In other words if I don't have a valid edge, my system will eventually stop me from trading completely. The way it works for me, holding to strict risk management rules on a daily and weekly basis actually "insures" the profitability of my system on a monthly, quarterly and yearly basis. Sorry I can't provide more details but I wanted to give folks some idea of what can be accomplished if you really look into the subject.

 

Because I always hear this question I will answer it in advance. Yes you still have to have an edge for this kind of risk management to work....If you don't have an edge, this system will eventually make you stop trading...all this does is maximize the result you get when you have an edge (and the discipline to trade it).

 

Best of luck to all

Edited May 9, 2011 by steve46

[Tradewinds 12]

If you were right 100% of the time, you would never need a stop. So the issue is about whether you are right or not. Then there is the issue of luck. You could have an order taking draw down, but then be at another high probability set up in the same direction as the order. In that situation, it doesn't make any sense to exit. But the key is having a way to judge what the probability of success is. If there is no way to judge how probable the next price move will be, then trading is nothing more than managing a gamble. That is part of trading, but is it more of a gamble, or more of an informed decision? Let's say that you take a loss, and re-enter, take a loss and re-enter, and then take a third loss; if it were me, I'd be thinking that there is something that I don't understand. So there would be a fundamental issue other than where to place the stop loss.

 

Here is another thought. If you enter an order, and you are wrong, then why wouldn't you just reverse? I'm not suggesting that is the right thing to do, I'm just getting back to the point of knowing what the price is going to do.

[bwebber 10]

I have never found market stops to improve system profitability, so I place them as wide as possible, based on the amount of pain I'm willing to endure. I think what is more important is to diversify your trades so that you don't have everything riding on one trade.

[MightyMouse 12]

This is the "logic" that I often hear from those who haven't taken the time to adequately test their own systems, or from those who have insufficient experience in a market.

If you know what you are doing you can corellate stop placement with volatility, that way on an individual trade basis you can minimize the cost of being wrong and on a systemwide basis (over a period of months for example) you can keep risk down to a point where you know that profit will always exceed expenses.

For individual trades I know where I am wrong because "being wrong" corresponds to a boundary of my supply or demand node. Once price closes above or below a "node" the reason for being in the trade is invalidated and I have to pay up.

On a systemwide basis, I can allow myself to be wrong a specific number of times per day, week and month...once I use up those "bullets" I'm done. In other words if I don't have a valid edge, my system will eventually stop me from trading completely. The way it works for me, holding to strict risk management rules on a daily and weekly basis actually "insures" the profitability of my system on a monthly, quarterly and yearly basis. Sorry I can't provide more details but I wanted to give folks some idea of what can be accomplished if you really look into the subject.

 

Because I always hear this question I will answer it in advance. Yes you still have to have an edge for this kind of risk management to work....If you don't have an edge, this system will eventually make you stop trading...all this does is maximize the result you get when you have an edge (and the discipline to trade it).

 

Best of luck to all

 

Right! Sure! The markets do exactly the same thing every time. You should crawl back into a hole until you are prepared to prove that you have a right to be arrogant. Otherwise you are plain BS.

 

Once again, old man, you simply do not have the balls. Big mouth and no balls and a fear of being exposed. Sounds like a recipe for success.

 

Whether or I know what I am doing, I at least have the balls to take trades in an open forum with before the fact information for all to see. Something that you fear.

 

Carry on with the name calling. That is the only tool you have.

[Wyckoff Trader 10]

I always enter with a "disaster" stop...

 

Once I'm in a trade, the actual exit point is dynamic and traded manually.

 

Cheers

[Tradewinds 12]

For individual trades I know where I am wrong because "being wrong" corresponds to a boundary of my supply or demand node. Once price closes above or below a "node" the reason for being in the trade is invalidated and I have to pay up.

 

Thanks for sharing that Steve. I've looked at your posts about the supply and demand nodes, and find it very interesting. So it seems that your "stop loss" for a long order would be when price drops below the node band. If this is your "stop loss", then personally, I prefer this tactic for a stop loss rather than a specific price target.

 

In your case, if the band for taking a long position is broken to the downside, which is a failure to maintain support, it's a reason to stop the loss. I'm taking the liberty to make some assumptions here. I'm just guessing at how you are trading.

 

Again, it seems that your "stop loss" is the failure of your long signal, NOT a specific loss target. I use the same logic. It's not about a specific loss amount, it's about whether the reason for a trade is still valid or not.

[Tradewinds 12]

I always enter with a "disaster" stop...

 

Once I'm in a trade, the actual exit point is dynamic and traded manually.

 

Me too. I mean, enter a target. Don't make it too small.

[steve46 12]

Thanks for sharing that Steve. I've looked at your posts about the supply and demand nodes, and find it very interesting. So it seems that your "stop loss" for a long order would be when price drops below the node band. If this is your "stop loss", then personally, I prefer this tactic for a stop loss rather than a specific price target.

 

In your case, if the band for taking a long position is broken to the downside, which is a failure to maintain support, it's a reason to stop the loss. I'm taking the liberty to make some assumptions here. I'm just guessing at how you are trading.

 

Again, it seems that your "stop loss" is the failure of your long signal, NOT a specific loss target. I use the same logic. It's not about a specific loss amount, it's about whether the reason for a trade is still valid or not.

 

Yes, you have it right on target....the only question to resolve is whether the size of the supply/demand node is too big for your risk tolerance....you see what I mean? I use that data to decide whether to take a trade or to stand aside....Also if I may add to that...if you think about it...the size of the supply/demand node is related to the time frame of the chart....on longer term charts the size of the node is bigger, therefore if you see a nice setup, you have to be willing to take a bigger risk....and the final "take away" is that you also want to have a bigger potential profit target on your horizon....Depending on your perspective, this can be "pro" or "con"...but one thing it does is "enforce" a realistic size stop for every trade setup.. Hope this helps you.

 

Best Regards

Steve