Finding The happy medium with MANAGING LOSSES is the key to tipping the scales.
Listed are the main techniques used to manage losses, they all have there pros and cons some more than others. The struggle is when to use which of the listed methods.
Quickly Cutting Loses:
The pros: it can prevent large draw downs and allow you to re analyse the market without the pressure of committing to one direction. Perfecting this can be the Defense needed to protect your End Game.
The cons: This can lead to balking or unnecessary losses in trades that would have played out in our favor had we just allowed it room to move. If we Balk Excessively it implies that we are not committed and even confused or unsure in our analysis. Unless this is perfected The consequence is OVER TRADING and losses in commission and points.
Moving to Break Even/Trailing Stop-
Pros: This can lock in profit when we get a move in our favor and insure that we are profitable on the trade, it is a good feeling knowing that your are in profit with more room to the upside. Theoretically this is very appealing. This method was used by Richard Wykoff and is mentioned often by VSA traders Sabastion and Gavin Holmes (Wykoff Followers). However I think we need to consider the time in which Wykoff Traded the markets. Wykoff started trading at age 15 in 1888 and published writing during the 1930's. An icon to be respected but we are no longer in the old days and we must be up to speed with the current conditions.
Cons: When we move to break even, often times we got stopped out on the TICK, and price then continues in the intended direction. When this happens it cost us time, energy, opportunities, and money and can also lead to over trading if this continues to happen. Also when we get taking out by stops we lose in slippage as price is market against your direction.
Consequence: In my experience, more often than not, Break Even Stops sabotages Profits and is self defeating in today's markets.
Hard Stops (less than 4pts):
Pros: Stops are the most necessary means of preserving your account. This is known fact and truth that must be adhered to. However I think that day traders are overly obsessed with the technical side of "placing a stop" after all this is what EVERY book teaches and All trading preachers preach. But like much of the information we receive in daily life there is rarely any real life practical standards set to follow, thus leading to the literal application of a very general and ambiguous rule. Not to mention this information is Known and can be acted upon by specialist and market makers taking advantage of what is commonly practiced by new and small traders.
Cons: Stops almost guarantee that you will suffer a loss of the specified amount regardless of your analyses. More importantly they are a primary source of weakness used to MANIPULATE the very market you stand to profit from. Unless you can afford the major swings it is wise to use them but....
I think we need to put the STOP thing into perspective!! Proper analysis will usually provide you with a general direction so nailing a perfect price is too much to ask from any trader, thus looking to enter within a reasonable range that allows price room to play out is a more reasonable approach.
Many have figured techniques that will allow for minimum $ loss when incorrect, and others have sworn by strict money management in the form of stops set at a % of overall balance.
BUT the key concept regarding STOPS that I feel is deliberately NOT taught is that STOPS are meant to prevent THE MAJOR DRAW DOWN when UNFORESEEN EVENTS happen in the market. NOT to be stopped out at every turn of price.
The consequence: If we HONER stops too Strictly we get hurt in confidence, MAXIMIZE losses and more importantly we set ourselves up to be stopped out by manipulation.
REAL LIFE Notes about Stops:
In the past my most successful runs in the markets came when I abandoned Stops all together!! Yep I went weeks without using stops at all, just placing limit order for exits, over time i saw my account grow substantially. I was essentially managing risk with size. The problem here was i left myself open to unlimited draw downs on any given day, without the proper leverage to sustain. This ultimately lead to the demise of my account when the Forex markets reversed on major time frames. But prior to this discovery I was consistently being stopped out even when my analysis was correct or generally accurate, Before this "NO stop realization" I never had any consistent weeks or month of profit, so there was definitely some lessons to take from the experience. The next step is finding a happy medium. What i found to be a good cue to exit a trade is the use of Time Stops In which i use Price Cycles to determine if the trade playing out. Typically im looking for the 2nd cycle to be in our favor, allowing time for the price run, If the 2nd cycle is against my position then I will exit, win, lose or Draw (in theory??) What i found was that many times my Set stop is triggered in a break of the 1st cycle or prior to the 2nd cycle, suggesting that I needed to widen my stop even when employing this method, This method is helpful in quickly scratching losses when price is given room to move. click here to see details of Timed Stops.
Proven Trader Don Miller: Uses Size to manage Risk. He states that markets are imperfect thus your entries should be within respectable ranges. Professionals with high leverage usually leg into positions spread over a rang of points. an excerpt from TAD discussion Of course it’s difficult to get into all of the aspects and nuances of proper trade management in such a short snippet … thus the continuing intention to show a variety of conditions over multiple episodes and the disclaimers throughout the TAD site and early in the video.
Yet to try to clarify and reiterate, I of course believe 100% in risk management (day and career) which is the trader’s and market maker’s life preserver. I also somewhat agree that there’s no single “right way” to trade (“somewhat” meaning there are several asterisks in that certain fundamentals including overall risk management and adding to winning positions at appropriate times simply can’t be ignored) as pointed out in the Jellie program which begins by laying out the various ways to trade trading channels and market inefficiencies from a wholesale perspective.
The Jellie course also describes the effective use of premise-based (NOT some arbitrary point-based stop which ignores the true trade premise) as as one of the ways to accomplish this, and the late July PivotPoint client stops I discussed in last week’s PivotPoint Investment Briefing which allowed clients to completely avoid a subsequent 10% market crash were prime examples.
Another variable in strategy is the single vs. multiple entries and exits, where as a market maker I emphatically choose the latter to make up for market and trader imperfections even as I acknolwedge that some successful speculative traders use the former … which of course ties directly to the choosing an applicable and appropriate stop methodology.
Havng said that, I’ll go to my grave knowing that the topic of “stops” and how/when to use them is so misunderstood by the masses, it borders on ridiculous … one example of many points being if they’re used, they’re more momentary “reassessment points” where a trader should simply reevaluate … possibly with an immediate re-entry … perhaps a reversal … or even a “no immediate action” decision. This concept is especially critical as a professional market maker in the S&P E-Mini Futures which I’ve been doing since 2004.
In terms of providing highly short-term wholesale liquidity at optimal and excessive market points which was the case in the first sequence example, historical statistics (Larry Connors has done some great work in this area) prove that using them to exit trades as the final traders are getting shaken out is flat out wrong and costly over time … even when considering the aspect of variance.
In the first sequence example, which we see over and over again in trading extreme futures markets, clearly using the most recent low or high AFTER the market had already reached an optimal zone (i.e. 3rd or greater push with air galore that shakes the weak) as a complete uncle point is a losing proposition over both the short and long run.
Yet I suppose my main point was to open the eyes of many to looking at risk management in a different light.
For as in chess, one can sacrifice a large number of pawns to protect the queen.
10 points on 5 contracts (the pawn) is the exact same “financial risk” as half a point on 100 contracts (the queen).
And as I’ve said in many public talks, varying bet size for me is undoubtedly THE largest contributing factor to my performance reaching the upper levels of the industry for my asset class in recent years.
Again, great note and stimulating dicussion … hope this helps.
Stay well.
Don
Proven Trader Barry Taylor: uses a 4 point stop and basically preaches NEVER use Trailers or Move to break even. He commonly cuts losses and Reverses trades when signal suggest. Click here to see Barry Taylor's Take on Stops.
The MAJOR CLUES to scratch or Reverse position.
#1 Price moves away from entry immediately and stays
#2 Price spends little or NO TIME in favor.
#3 Price breaks S/R on 500, 1500 or 4500 tick charts.
