Metaphors for Stops & Limits (S&L)

[Feng 10]

I had a wild ride in June: balance opened with 2 big gains. Because I was mostly shorting stocks, a week of rising markets plunged me back to break even for the year. Then, finally, blessedly, groking that the markets had turned, I closed shorts and bot long. Barely ended the month with a gain on 4 days of gains.

 

On reflection, I saw that having stops or limits on my orders would have preserved over $1000 of my balance.

 

So, I asked myself, what's behind *not" using these tools?

 

One experience came to mind immediately: trading the market w/o S&L feels "freeer" and more "masterly."

 

S&Ls feel like training wheels!

 

I had some success with S&Ls long ago when I knew I was going to away from daily attention to markets and wanted my holdings to stop out in case the market dropped. That is indeed what the markets did, and I was very happy to have put in those stops while away.

 

My experience with training wheels is that were am annoyance and symbol of many things wrong with my relationship with my dad. When I was 5 or 6, as the first born child, he bought me a bike that fit him! Rather than getting a smaller one, I literally had to grow up to 11 or 12 to be larger enough to ride it. I had brothers (with smaller, kid-sized bikes) riding 2-wheels before I did. I vividly remember the day of no return when I took off those training wheels and mastered the #$^$ thing!

 

Even today, 40 odd years later, I can feel the heat of the blushing and shame (?) that I was that big and old and could not ride.

 

So, clearly, this metaphor doesn't help. I have several options, one of which is to find a therapist and work this thing through. Another, and faster-cheaper option is to change the metaphor.

 

Some come to mind: S&Ls are ...

 

Nets, like those used by high-wire acts.

Life preservers, like those worn when white water rafting

Air bags, like those that deploy when cars hit things

 

I might work with these. Don't feel any blushing, shame.

 

I WANT to use a life preserver on a white water adventure! I like this one best of the three, also, because rafting is a mix of turbulence I navigate with my actions (some skillful, some not). Should the preserver be needed, it ought to help me stay alive so I can take another trip.

 

Thanks for reading. This has helped.

 

Feng

[jpennybags 11]

Stops are tools... use them wisely, they will serve you well. The markets are a place where you are free to do whatever you want... no one will stop you... or even try. You can crash your bike and suffer all the skinned knees and elbows that you can manage... ride it off the roof of your house... jump canyons with it. You're free to do as you please.

[MightyMouse 12]

 

Some come to mind: S&Ls are ...

 

Nets, like those used by high-wire acts.

Life preservers, like those worn when white water rafting

Air bags, like those that deploy when cars hit things

 

I might work with these. Don't feel any blushing, shame.

 

Feng

 

Stops are almost never like your metaphors. There really isn't the same risk in the market that a net, air bag, or parachute protects you from. Nothing in the market will kill you. In the end it is just money.

 

Stops are more like a small (hopefully) insurance policy that you buy so you won't lose a lot of money if you are wrong. Most stops end up being frustrating and a waste of money which is why so many people try to trade without them. I use them no matter what, simply because I see loses as a cost and any business is going to have costs and as long as I have enough revenue to overcome the costs, I will be just fine.

 

Good luck with the dad thing

[SIUYA 11]

capital preservation tools.

sleep soundly habit

friends

insurance

 

(or if it works for you....the f..k you Dad tools ....FUD tools

Make them your own - if your father would not get you a bike to fit, use tools that you choose to fit....maybe not recommended by most therapists. )

[Feng 10]

Oo, thanks for the stack of other metaphors: tools, insurance policy, sleep well habit, friend, and F-U Dad.

 

All of these add more variety to my inner world. They give me choices. I find I get stuck, and my friend or clients do as well, when they have limited alternative mental models (metaphors, if you will) for what they are doing in the context of what is happening around them.

 

Sleep can be disturbed by the risk/reality of losses AND/OR the risk/reality of missed rewards (gains).

 

I did find that I felt less eager to constantly check in when my stops were set.

 

Then, one tripped, selling half of my position, did nothing for a day, then has taken off on a steep climb. (The symbol is DDD).

 

In a way, by selling just part of my position, I am trying to straddle both sides of my personality: a feeling of freedom and skill plus an automatic protector against quick & steep declines. When the stop trips, it also serves as an alert for closer inspection.

 

All good.

Feng

[Predictor 11]

Let me suggest something else, stops are the primary cause of losses for traders. Stops simply convert open realized loss into a closed form loss. This can be helpful in cases -- such as when your analysis is wrong -- but they absolutely do not work like insurance. Insurance is suppose to protect you when you are wrong but a poorly set stop loss will cost you even when you would turn out to be right! Options and spreads really do work like insurance but they are costly.

 

It is possible to trade with stop losses and produce a profit. However, the difficulty of using tight stop losses is an order of magnitude more difficult then simply not using them or only setting really large stops. Stop losses can be one important tool for controlling risk but won't magically make a trader more profitable. In fact, there is a very good chance that stop losses will make a profitable trader less profitable. But, this doesn't mean that they shouldn't be used. I use them in all of my trades because I haven't been able to work out a better method... yet.

 

Logically the stop loss converts an open drawdown into a closed drawdown. This can be positive in that it caps the max risk of a trade/day but it has the negative effect of increasing the "load" on the drawdown or realized loss side. Hard stops also tend to move the median/average loss to the maximum stop which can be detrimental...

 

Now limit orders are another matter, they do work in a way that is similar to insurance except one has to question if it makes sense to "take out insurance" when a trade starts to work out. But, I do think that for certain styles of trading -- limits are invaluable...

 

Best metaphor I can give.. stops are like going to a bad dentist with a bad toothache.. Stops hurt but might hurt less then the alternative.

 

Having said all that.. I probably wouldn't be able trade without them.

Edited July 3, 2012 by Predictor

[Feng 10]

Metaphor definition: 'A metaphor is an implied analogy that imaginatively identifies one object (or person) with another and ascribes to the first object one or more of the qualities of the second,' (from A Handbook to Literature, ed. C. Hugh Holman, The Odyssey Press).

 

Predictor wrote: "Best metaphor I can give.. stops are like going to a bad dentist with a bad toothache."

 

Ouch! That may work for you when encouraged to come up with a metaphor, but for me, if I thought like that, I'd only use a stop once every 4 - 6 months and definitely find a better dentist!

 

I certainly would never use it when thinking/feeling about something I want to enjoy for a long time.

 

Another response questioned metaphors that evoked risks of physical injury saying trading is 'just money.' Next time you're tempted to not pay your credit card bill, do you think a note saying they should understand because it's 'just money' would fly?

 

This came in a comment that using life preservers as a metaphor didn't fit because trading involves 'just money.' Images (metaphors) of violence, life and death are chronic in the financial literature.

 

George Soros tells someone he changes his mind about the market "and made a

killing

."

 

Movies "kill" at the box office.

 

NY Times headline: "As I.P.O. Market Shows

Life

... "

 

Southwest paper headline: "Home sales up as housing market

shows life"

 

Forbes headline "Blackberry

dying

on the Vine ... "

 

Fortunately for this excursion into lit crit, my metaphors need not pass any test but that they help me learn to use the tools of the trade successfully.

 

F