Question for traders about stops

[cuttlefish]

When your stops are hit, do you sell at market? Or do you still put a limit order on?
(assume we're talking about a heavily traded stock with very good depth).

[tech/a]

For me its at Market could get some slippage but if the stops hit thats out.

[Ageo]

For me the stop is a gauranteed price. So if its stated at X amount then no matter how far it drops or rises i get stopped out for that price.

[cuttlefish]

For me its at Market could get some slippage but if the stops hit thats out.

thanks - that makes sense to me as well but was curious.




For me the stop is a gauranteed price. So if its stated at X amount then no matter how far it drops or rises i get stopped out for that price.

Ageo - I was mainly wondering for direct shares - but I'm assuming you're getting the guaranteed stops with CFD's?

[happytrader]

If I 'feel' threatened I'm out regardless of whether my stoploss has been hit or not. Otherwise, its out at market.

Cheers
Happytrader

[Ageo]

Ageo - I was mainly wondering for direct shares - but I'm assuming you're getting the guaranteed stops with CFD's?


Oh sry, yeh i thought you were just asking in general. And yes the stops i get are guaranteed

[doctorj]

If my stocks are hit I'm out at market. Rules are rules and I'm not going to hang around for a tick. I'm more than happy to wear the slippage in the interests of managing risk.

To put in a sell with a fixed price could see it sitting in the depth until it expires which is complete contridiction to what a stop should be all about.

[brerwallabi]

With out counting back I would estimate that almost all my losing trades are exited by a stop/loss.
Now a fair amount of my winning trades (unless awaiting dividend or a long term buy) are also exited by a stop/loss, but the hardest thing I guess is when your on a winning trade is to keep that stop/loss going. Earlier this year I lost PEM as I had a stop/loss in place and it dropped about 15% in a day then it shot back up through $2.00 to over $3.00. I believed I was protecting my capital in using a stop/loss and will not operate in any other way, I learned the hard way.
Trading without stop/losses however leaves you no defence against Mr Market, protection (limiting losses) of your capital must be your major focus.

[tech/a]

B
You can overcome your whipsaw by having a re entry criteria.
Its happened more than once where I have a stop hit --more than once ---then off it goes.
Point of a stop is that often those that are hit fall way beyond the stop.
Its simply a cost of doing business.

[MichaelD]

B
You can overcome your whipsaw by having a re entry criteria.
Its happened more than once where I have a stop hit --more than once ---then off it goes.
Totally agree. Tighter stops get whipsawed more often. Wider stops give back more open profit before being hit.

There is a range within which a given stop operates most efficiently, but no matter where the stop is set the whipsaw trade where you get stopped out only to see the stock take off without you is something that will happen all the time, and is probably one of the hardest things to handle psychologically if you look for it.

However, so long as you consistently take the stops as pre-planned, you'll capture enough long tail outliers to be nicely profitable. Individual trade outcomes in the scheme of things are irrelevant.

Personally, as soon as a stop of mine is hit, the stock is closed at market the next day and then removed from my watchlist never to be looked at again unless it triggers a new entry signal. This de-emphasizes the importance of any one individual trade in my overall plan.

[brerwallabi]

Tech
Agree with you it is just another transaction (cost of doing business) and sometimes we have to give something back. As far as re entry is concerned the secret is not to look at the share as a lossmaker (unless its Nylex or Mul) but look to see if there is an opportunity at some stage in the fall, recent support may be a re entry point and I have bought back into some shares at this point when a share has come of that support line. The same rule applies when I purchase back in - put in the stop/loss.

[GreatPig]

Personally I always use at limit sales. For highly liquid stocks there's no problem just taking the current bid, but for thinner stocks, it's very easy to get caught out with a sudden loss of buyers with at market sales, potentially making a huge difference to the sale price.

Cheers,
GP

[IGO4IT]

Considering that the buy was based on a "fundemental basis", I wonder if our stop losses are actually valid if there's no fundemental event resulted to the drop...practically I defenitely do not put a stop loss unless there's a fundemental change that could effect fund of the company I'm holding.

Dynamics of buy & sell could naturally &/or "on purpose" go below technical lines just because someone(s) are intrested in accumulating shares on cheaper prices & I could & had been a victim few times depending on technical stop losses & forgetting about fundemental values which I bought with at first place & defenitely lost because others made me scared of the unknown & got me selling cheaper with no fund change!

Feeling scared imo is more about evaluating new added news that could effect fund value of any company & fear is coming from what loss could the new news affect the fundementals. Following depth as a guide is 100% of cases in my case misleading as tricks are played day & night. So only option is basing stop loss on technicals & these are played with all the time.

In summary, if the stop loss is to prevent anyone from losing on a declining market, I would ask the question of why were you holding in a company that could decline at the first place, the theory is you don't hold shares for 10 minutes in a company that you don't trust holding their shares for 10 years, if that is the case...then dynamics of buy & sell will never affect the strong fundementals of the company you're holding & should never make you scared of them declining. The risk becomes the longer time you'll hold your parcel until market evaluates the fundementals again & give value back to your share.

I still question myself up to this moment if all my stop losses were really stop losses or "trying to feel comfortable" by not holding a declining share that in 90% of cases had gone up in few hours/days from time my stop loss is triggered.

If ever you had a fund change that could make you feel that fund were played with then defenitely sell on market at earliest point available & take your loss & be happy but for me to re-determine the point where my share could dip & I can't handle it any more....I would defenitely analyse the share more & try to short it.

My theory is always...I'm long on strong fundementals & short on fear :)

cheers,

[brerwallabi]

IGO4IT
I have quite often made purchases based on nothing but a buy signal triggered by certain criteria, and know nothing about the company (fundamentals) whatsoever. I must say that volume traded (liguidity) has some bearing here.
I think the original question was aimed at traders dealing in possibly speculative stocks that heavily traded, so fundamentals are quite different in comparing say WOW (Aussie Heavyweight) with say AIM (risky African play) both heavily traded.

[IGO4IT]

IGO4IT
I have quite often made purchases based on nothing but a buy signal triggered by certain criteria, and know nothing about the company (fundamentals) whatsoever. I must say that volume traded (liguidity) has some bearing here.
I think the original question was aimed at traders dealing in possibly speculative stocks that heavily traded, so fundamentals are quite different in comparing say WOW (Aussie Heavyweight) with say AIM (risky African play) both heavily traded.

Sorry if I took the subject of discussion a bit further.

Many traders fall under the same rule imo, volume , price spikes & events traders.

imo, if you're simply putting your radar or your alert trigger "marketwide" then it's not safe. You're trading the unknown.

For instance, putting your money in a stock that kept going higher for last 1-2 hours & volume is very heavy is a gamble not a trade.

You're predicting that trend will continue & it won't fall 2 seconds after you buy, there's no solid info that you're depending on to stop you from losing or winning any amounts. I call that gambling. proffessional gamblers can also follow a streak of wins regardless of the game & they sometimes win.

I personally do sometimes the same, trade volume, price spikes or event but ONLY on my list of selected stocks that I know over the years. My watchlist has over 200 stocks & I try to keep adding to them all the time but I read about new ones & they have to pass a certain test first before I can add them into my watchlist. I have a fund value for each & I usually add a "potential" value that market already added to fundementals. if any spike arise, then I get an alert & trade them knowing where my fundementals are.

If you trade the unknown then you should expect the unknown & your competitors (other traders) in that sitiuation of "heavy" volume, have an advantage over you that they know more information than you, which by turn will mean that they'll get out faster than you & their buying & selling parcels size will be calculated wiser.

I don't know about others, but it doesn't bother me if fund value is in cents or dollars, the idea is for me that I can't trade any stock unless I know that if I'm stuck in that trade for few days or weeks then I'm safe. I could be conservative in handling risk but defenitely never regreted a trade even if I lost in it :)

Sorry again to get off topic but I'm totally againist stop losses. I lost heaps from it & loss from a stop loss hurts me more psychologically than losing from being stuborn!

cheers,

[GreatPig]

You're predicting that trend will continue & it won't fall 2 seconds after you buy
IMO, trading technical signals is not about prediction (except perhaps in a few special cases), but rather about working with probabilities. In the same way that poker machine operators don't expect the machines to win (ie. the players to lose) any particular games, they know that in the longer term, the machine probabilities are in favour of them making a profit.

In the case of a poker machine, those probabilities can be determined exactly mathematically, but in the case of the stock market, the probabilities are only based on historic study and are not exactly quantifiable, as they're based on crowd behaviour which can change. However, that doesn't mean that they can't still be traded profitably over a period of time, as the market is not random. Having a higher-probability signal to enter a trade is one thing, but there must also be some signal to exit, which is where stop/losses are often used.

GP

[MichaelD]

You're predicting that trend will continue & it won't fall 2 seconds after you buy, there's no solid info that you're depending on to stop you from losing or winning any amounts.

For instance, putting your money in a stock that kept going higher for last 1-2 hours & volume is very heavy is a gamble not a trade.

Sorry again to get off topic but I'm totally againist stop losses. I lost heaps from it & loss from a stop loss hurts me more psychologically than losing from being stuborn!
A couple of points.

1. Trading of any sort, fundamental or technically based is essentially gambling, yes. Anyone that thinks otherwise, no matter how fervently they believe in their pet theory, is only fooling themselves. However, there are a few differences which make the numbers bias in your favour instead of the house's favour, namely that the game overall is a net winning game unlike other forms of gambling (eg casino) which are net losing games. The best traders are the ones that can manage their gambles most profitably to take advantage of this edge.

2. What is the expectancy of your trading? If you don't know, you are an amateur gambler and will eventually lose. "I never once met a large loss that wasn't a smaller loss first" sums it up nicely. Personally, I'd rather be a little bit wrong most of the time (and nicely profitable overall) than right most of the time but lose the game.

[It's Snake Pliskin]

A couple of points.

1. Trading of any sort, fundamental or technically based is essentially gambling, yes. Anyone that thinks otherwise, no matter how fervently they believe in their pet theory, is only fooling themselves. However, there are a few differences which make the numbers bias in your favour instead of the house's favour, namely that the game overall is a net winning game unlike other forms of gambling (eg casino) which are net losing games. The best traders are the ones that can manage their gambles most profitably to take advantage of this edge.

2. What is the expectancy of your trading? If you don't know, you are an amateur gambler and will eventually lose. "I never once met a large loss that wasn't a smaller loss first" sums it up nicely. Personally, I'd rather be a little bit wrong most of the time (and nicely profitable overall) than right most of the time but lose the game.

Perfect theory there MichaelD. :)

[It's Snake Pliskin]

When your stops are hit, do you sell at market? Or do you still put a limit order on?
(assume we're talking about a heavily traded stock with very good depth).

Cuttle,

I once set a stop to sell at the trigger price; what a mistake it was. Anpother sell order came through just before mine and it was large. I had to reset it to get out, luck I was at the computer. So going out at market doesn`t seem such a bad thing to me.

[IGO4IT]

A couple of points.

1. Trading of any sort, fundamental or technically based is essentially gambling, yes. Anyone that thinks otherwise, no matter how fervently they believe in their pet theory, is only fooling themselves. However, there are a few differences which make the numbers bias in your favour instead of the house's favour, namely that the game overall is a net winning game unlike other forms of gambling (eg casino) which are net losing games. The best traders are the ones that can manage their gambles most profitably to take advantage of this edge.

2. What is the expectancy of your trading? If you don't know, you are an amateur gambler and will eventually lose. "I never once met a large loss that wasn't a smaller loss first" sums it up nicely. Personally, I'd rather be a little bit wrong most of the time (and nicely profitable overall) than right most of the time but lose the game.

Gambling: you're betting on an unknown outcome & there are no rules to favour any particular outcome & you or anyone have no control in affecting the outcome.

Trading: you're betting on an unknown outcome & there are rules to favour a particular outcome (not to guarantee it) & you & everyone (in some cases) have little control in affecting the outcome. Mass psychology & fundemental values gives you extra info about the probability of reaching a certain outcome. In gambling, you have no clue what will come up next!

Technical stop losses: you're using mass behaviour to determine your own behaviour...right in a sense that market will fall when trend is broken, if you dont follow you lose with everyone else as everyone is selling...wrong when you know regardless of trend that fundemental value is higher than market price.

That's my :2twocents

cheers,

[tech/a]

1. Trading of any sort, fundamental or technically based is essentially gambling, yes. Anyone that thinks otherwise, no matter how fervently they believe in their pet theory, is only fooling themselves.

If its simply a theory then I'd agree.


However, there are a few differences which make the numbers bias in your favour instead of the house's favour, namely that the game overall is a net winning game unlike other forms of gambling (eg casino) which are net losing games. The best traders are the ones that can manage their gambles most profitably to take advantage of this edge.

True,putting together a methodology which when tested rigourously returns a positive expectancy then trading that method will return a profit provided the method remains within the parameters returned upon testing.



2. What is the expectancy of your trading? If you don't know, you are an amateur gambler and will eventually lose. "I never once met a large loss that wasn't a smaller loss first" sums it up nicely. Personally, I'd rather be a little bit wrong most of the time (and nicely profitable overall) than right most of the time but lose the game.

Further to this with which I agree is that most traders lose at the exit end (By being to eager to exit).The saying "no ones ever gone broke taking a profit" doesnt understand Positive expectancy.

IE
5 30% losses and 20 5% wins = NETT LOSS.

Frequency of wins is just a portion of the equation.

[happytrader]

Just a bit of reframing here for those that find losses difficult.

Friends went four wheel driving down a beach. One of the vehicles had previously gotten stuck but the other vehicle had managed to pull it out quite easily. Later on down the track the same vehicle got stuck again.
No one was in the least worried even though after afew attempts they couldn't move it. Apparently, they were joking and quite jovial about it for quite awhile. No one even treated the incident as potentially serious or acted to get help. However, the hours went by they increased their efforts but to no avail. The tide came in and they could only watch.

Sometimes we are unaware of potential danger especially when we are surrounded by all the hype. Stoplosses are a traders early warning system to action. No one rationalises when it comes to a code blue they just do what they are trained to do.

Cheers
Happytrader

[GreatPig]

Technically, gambling is simply betting on an unknown outcome irrespective of probabilities. So Russian roulette with a six-shooter is gambling, even though the chances of winning are well in your favour (in the one bullet scenario for one attempt).

Long term gambling of any sort gives returns in line with the underlying probabilities. If they're in your favour, then you'll ultimately end up ahead (how long "long term" may need to be though depends on the variance).

So I think trading can well be considered gambling, but with the probabilities in your favour if your method has positive expectancy. You don't need to know the outcome of any particular trade, as long as you know (or are reasonably sure) that over the longer term, your wins will outdo your losses.

GP

[swingstar]

Most people would probably have a positive expectancy system if they accepted losses. In my initial stages of trading, I probably like most traders when they start out, held onto them. It became a lot easier to accept them and stop out (given that I trade options, I have to mentally stop out everytime, I would love to have a system that does it for me) when I realised that overall I'd make more money.

[cuttlefish]

swingstar - with options are your stops based on the underlying (i.e. do you put a stop loss on the price of the underlying) or on the options theoretical price. Or do you place the stop loss on a combination of price and volatility for example?

The reason I ask is because I've been mucking about with options and finding the stop side of it a challenge - e.g. if you do decide you want to exit its not that easy to dump at market like it is with a heavily traded stock because of the low liquidity of options (particularly if some of the series you want to stop out have moved OTM).

btw are you typically day trading options or are your positions over a few days/weeks? (I'd imagine there could be different strategies depending on timeframe).

[swingstar]

swingstar - with options are your stops based on the underlying (i.e. do you put a stop loss on the price of the underlying) or on the options theoretical price. Or do you place the stop loss on a combination of price and volatility for example?

I'll usually seriously consider exiting when selling at the bid would cost me my initial risk. I have a fair idea of where the spread will be given the u/l. Not always right, but not always far off.


The reason I ask is because I've been mucking about with options and finding the stop side of it a challenge - e.g. if you do decide you want to exit its not that easy to dump at market like it is with a heavily traded stock because of the low liquidity of options (particularly if some of the series you want to stop out have moved OTM).

Definitely agree. Although I never hold onto options that long and I've never picked a stock that has moved so much that it's gone that far OTM that I can't get rid of it. That is, when buying ATM.


btw are you typically day trading options or are your positions over a few days/weeks? (I'd imagine there could be different strategies depending on timeframe).

Usually no more than four weeks and I've never exited within a day.

The more capital I build the more I'm thinking of switching to shares. I need to look at my system and see if shares would match the profitability. Maybe with decent leverage... I only really use options to limit my exposure, I haven't looked much at many strategies.

[cuttlefish]

cheers - you sound like you're a lot more organised than me lol :o

[swingstar]

From your posts it seems you have a lot more theoretical knowledge of options than me. All I know is, I buy ATM and if the u/l moves I make or lose money :P Usually doing that, I can use $5k exposure to take the same profits of having $50k exposure buying the u/l outright. If a plane hits a building, I lose $5k instead of $50k.

I do need to study options theory more though... my system as it stands is profitable enough for me, but knowing more about options could probably increase my profitability, or going by some of wayneL's posts, totally scare me off in realising I've just been lucky :P


BTW, in response to IGO4IT, I believe anyone who throws money into the market is gambling. Nobody knows what it's going to do next. If you throw money out there, there's no guarantee you're going to be right more so than the next person. And even if you are, it's not conclusive that your analysis was right.

[MichaelD]

It became a lot easier to accept them and stop out...when I realised that overall I'd make more money.Exactly.

The big picture questions, however, are what was it that made you realize that taking stops would make you more money overall, and why do the great majority of traders never get to this point?

[It's Snake Pliskin]

Exactly.

The big picture questions, however, are what was it that made you realize that taking stops would make you more money overall, and why do the great majority of traders never get to this point?

Yes, yes.

Because they read a couple of books and focus on buying, then greed, then failure then disapointment and finally exit the game.

[lesm]

Another way to look at this, is that if traders know about stops, but fail to:
1. execute, or
2. implement.
them.

The first may be related to emotion/psychology and/or fear.

The second may be related to greed or simply that it won't happen to them (over-confidence/infallibility).

Or it may be just as simple as they didn't read that section of the book. :rolleyes:

[swingstar]

Exactly.

The big picture questions, however, are what was it that made you realize that taking stops would make you more money overall, and why do the great majority of traders never get to this point?

For me, the first few months I made 100% then gave back 50%. So basically I was at where I started and in fact less, since I had pulled 'profits' out of my capital for spending. In fact some of my first few wins were from holding onto losers, so I developed this attitude that holding on that they'd eventually turn around and at least break even. Obviously it didn't work everytime.

After that, I jotted down what I'd have had I stopped losses at a number of fixed percentages. Obviously I couldn't factor in some of the wins since they would have been stopped out had I done this from the beginning. Overall I was well ahead even though I wouldn't have had some of the gratifying experiences of the big wins (and also the heartache of waking up each morning to see thousands lost to the market).

It was about this time that I read Van Tharp and the Market Wizards books, and nearly every trader said this. In fact I typed up heaps of quotes and pinned them all around my room to drum it into my head (my mum thought I was weird). You forget all logic when you're at your stop loss and your emotions are telling you to hang on (as we all know), so I would just read a quote and do it. Highly recommended if you have to mentally stop and you have trouble doing it.

Also, it sucks being stopped out of a profit. But for me it's just as gratifying seeing what I would have saved stopping out of a big loss.

BTW, are you the MichaelD of michaeldvd.com ?

[tech/a]

Yes, yes.

Because they read a couple of books and focus on buying, then greed, then failure then disapointment and finally exit the game.


Snake is this tounge in cheek??

[It's Snake Pliskin]

Snake is this tounge in cheek??

No.
Why?

[tech/a]

The big picture questions, however, are what was it that made you realize that taking stops would make you more money overall, and why do the great majority of traders never get to this point?

Because I'd have thought that you knew that the case you present is far from the actual realization which traders "eventually" come to.

Your reply is one that I would expect from those traders who dont look past "gambling" infact dont have much of an idea of how a methodology actually improves their trading from Gambling to Business.

Simply the goals of a Positive Expectancy Methodology are more about Business than trading itself.


Because they read a couple of books and focus on buying, then greed, then failure then disapointment and finally exit the game.

When traders get to this stage simply placing a stop could (And generally does) mean that traders will bleed to death slower rather than from sudden heart failure .

[TraderPro]

Oh sry, yeh i thought you were just asking in general. And yes the stops i get are guaranteed

Ageo, how are you finding trading with GSLOs? is the extra cost worth it? any regrets?

[It's Snake Pliskin]

Tech,

I'll take your attack as ignorance to my actual business situation.

I present no case, just comment.


Because I'd have thought that you knew that the case you present is far from the actual realization which traders "eventually" come to.

And this is what I pointed out in my comment, although didn`t opine continuously, merely alluded to it.


those traders who dont look past "gambling" infact dont have much of an idea of how a methodology actually improves their trading from Gambling to Business.


Simply the goals of a Positive Expectancy Methodology are more about Business than trading itself.

Well, well you haven`t taught me anything here.


When traders get to this stage simply placing a stop could (And generally does) mean that traders will bleed to death slower rather than from sudden heart failure

Nice analogy. :)

Have fun :cool:
Snake

[tech/a]

I'll take your attack as ignorance to my actual business situation.

Not meant as an attack.

[happytrader]

There have actually been less that a handful of times out of the thousands of options trades I have placed where I did not have the opportunity to get out at 30% or less.

My number one reason I identified for overstaying has been because I have become attached to the idea of a specific outcome. Stop losses have been my best friend ever since.

Cheers
Happytrader

[MichaelD]

BTW, are you the MichaelD of michaeldvd.com ?Guilty as charged. :)

[brerwallabi]

Just spend the last 20 minutes putting into excel what I recently quit and calculated on todays close price what my trading holding/capital would be if I had not pulled my stop/losses and continued to hold some certain stocks.
I would be down $36k.
Not acceptable.
Although I have not reinvested all monies pulled out through stop/losses, I have been able to enter certain stocks that have delivered a PROFIT and still retained and increased my useable funds ahead of where I have been. I need profit to live and I need my useable capital to increase.
Stop/losses are my safeguard they allow me to quit a stock and allow me to enter another trade with the objectivity of making a profit using a system that I am comfortable using and has proved over a long period of time to be profit generating.
I can't see what is wrong with running with the herd and stopping before the edge of the cliff.