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Question for traders about stops

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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.
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If its simply a theory then I'd agree.


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.



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.
 
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
 
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
 
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.
 
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).
 
cuttlefish said:
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?
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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.


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).
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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.
 
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 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


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.
 
swingstar said:
It became a lot easier to accept them and stop out...when I realised that overall I'd make more money.
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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?
 
MichaelD said:
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?
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Yes, yes.

Because they read a couple of books and focus on buying, then greed, then failure then disapointment and finally exit the game.
 
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.
 
MichaelD said:
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?
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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 ?
 
Snake Pliskin said:
Yes, yes.

Because they read a couple of books and focus on buying, then greed, then failure then disapointment and finally exit the game.
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Snake is this tounge in cheek??
 
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?
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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.
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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 .
 
Ageo said:
Oh sry, yeh i thought you were just asking in general. And yes the stops i get are guaranteed
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Ageo, how are you finding trading with GSLOs? is the extra cost worth it? any regrets?
 
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.
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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.
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Simply the goals of a Positive Expectancy Methodology are more about Business than trading itself.
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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
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Nice analogy.

Have fun
Snake
 
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
 
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