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Some thoughts about stoplosses and capital growth

  • #1
  • First Post: Edited 11:00am Aug 5, 2012 4:48am | Edited 11:00am
Hello, i want to start a conversation about the use of stoplosses, their pro and cons, let's say that this is a abstract and philosophy style discussion, on a subjective scale.


Starting soon to analyze the various pros and cons, and some description on a more detailed way of what we are talking about, from the next post.
  • #2
  • Aug 5, 2012 4:53am Aug 5, 2012 4:53am
I've always traded without stoplosses, basically accumulating positions and releasing them later for a profit (the accumulation-release process used to last on average from a few hours to a few days).

Said this, the strategy lack of strict risk control (no stoploss), however using a proper MM (not overleverage) and a good strategy (entry and exit points) overall it used to be a very successful strategy, aka profitable.

The "problem" rely on the fact that occasionally the market move on an unexpected (subjectively speaking) way, and there comes time where we are forced to take huge losses.

What are the pros of this style of trading, basically the low-stress (remember, we use low leverage), and the huge winning % rate (more than 90%).
The cons, from time to time the only way to survive is to take huge losses, that anyway due to the low frequency of such event, such losses don't intact the account growth drastically.

Result: so far a good way of make profit out from the markets on a regular basis.
  • #3
  • Aug 5, 2012 5:04am Aug 5, 2012 5:04am
Here we are on the trading with stoplosses, i've used to trade this way from time to time, especially in the previous month (july) i've decided to give it a try.

The results was very bad, the month did ended with a nice profit, however the profit/loss developement was something like: +2 -1 +1 -3 +4 -2 +1 -2 +3 -1 -3 +2 +1 -1 etc...
Of course trading is mostly a relative game, so there is not exist a CORRECT way of do it, i just tried to do my best, using a decent R:R ratio.
Interesting to see also that the higher the R:R ratio is, the lower the expectations of close the trade in profit.

Another important thing to consider is just the nature of the market, a price that move in order to fullfill the market requests, in other words, the job of the price is just fill the various orders that appear in the market, in some way we can define the stoploss orders as take-loss orders, we are willing to take a particular loss on a particular price, and many times the market just fullfill our request as that is its job. Sound not very smart.
But let's analyze the stoploss trading style in a deeper way, next post (i split various posts to avoid a huge kilometric post that would be just annoying to read).
  • #4
  • Aug 5, 2012 5:22am Aug 5, 2012 5:22am
The emotional effect of trade with a stoploss in place, this is very interesting.
I've just noticed that the fact that we have a stoploss in place, lower the stress and release a sense of peace as we know that the risk on a particular trade is limited.
This may be looks good, but is a also very deceiving and dangerous.

I noticed in my trading some effects correlated with having a stoploss in place (please note i use the term "we" but i'm writing about my personal experience):

1) we feel "ok" to take trades that doesn't look perfect, after all the risk is limited, so we can just take a trade that looks good.

2) having the ability to place a stoploss, especially in the occasions where the R:R is huge and the stoploss distance from the price is not big, we can feel urged to use a strong leverage, especially after a streak of winners.

3) once a trade is in place, if the market start giving signs that such trade is not going to be a good one anymore, we may feel ok to stay in the trade untill the sl is hitten (too bad if we take a loss manually before our sl is hitten, only to see the market reverse soon later).

Now, what happen when we take a loss (sl), we all know about the revenge trading, that feeling that urge us to make a new trade soon later a loss, to recover back our loss.
I've noticed that revenge trading is much more strong when trading with stoplosses, especially when price hit your stoploss, and soon after reverse. In this case revenge trading becomes soo powerful because your setup maybe was good, market just did hunt some stops before proceed with the next move, and after all, risk is limited! so why not make a little revenge.
Or in case that market simply change drastically the sentiment, a new scenario happear where an opposite trade makes much sense (this is usually the kind of situation where revenge trading actually work and give back the loss, but not always), so we have the ability to get in at the beginning of a new trend, always with a limited risk.
  • #5
  • Aug 5, 2012 5:34am Aug 5, 2012 5:34am
In conclusion, what is the biggest disvantage of use a stoploss (based on my personal experience) is exactly the feeling of having a limited risk, we know that no matter how wrong a trade can be, no matter whatever happen, we are not going to risk more than x% of our account (1% 5% 0,5% 10% up to you).
It is indeed a great thing to control the risk and lower the stress level, but is not soo good for a nice and steady growth of the account.

Getting back to the no-stoploss way of trading, things are totally different.

We know that any particular trade may potentially damange our account, things can get out of control at any time, the consequences can be catastrophic, at any time, everyday.
The level of stress is always huge, and so is our focus and attention on any sign that the market give us at any time.
We cannot make mistakes, we must follow the developement of the market and our trades closely, and act fast if needed (add to a position, take a loss, wait, the possibilities are unlimited).
We must only take the best trades, and we must stay "awake" and focused all the time, there is no space for errors or mistakes, once again the stress is huge compared to sl trading, but we are somehow forced to avoid mistakes.
On the same time, knowning that we don't have a stoploss to protect us, force us to lower down our risk appetite, lower down the leverage, look at the market from any prespective, and on any scale, from the 1min to the monthly chart, taking the biggest amount of informations costantly to remain up-to-date to what's happening.
And most of the time, the result of this way of trading is just a huge winning%, a limited risk, and a nice and steady account growth with constant profits.
Ok, huge stress also and occasionally huge losses that wipe out part of past profits.
  • #6
  • Aug 5, 2012 5:50am Aug 5, 2012 5:50am
A final note, revenge trading without stoploss.

The revenge trading phenomenon when trading without sl is much weaker compared to sl trading.
Soon after we have a loss, we tend to look at how the market did developed in a way that tricked us, we know how much dangerous for our capital was the situation, and hopefully we managed to limit the damages, however our account now is on a drawdown situation (again, 1%, 5%, 10%, up to you).

The feeling that come at that stage is a very conservative feeling, our urge is not to make back the loss as soon as possible, but to learn from what did just happened. We did make a mistake, and the idea of make another mistake soon after is totally absurd. So, usually (always personal speaking) we tend to have a pause from trading after such event (1 hour 1 day 1 week 1 month up to you) untill we manage to understand what happened and how to recognize such situation if it happen again in future, aka we stay out from the market untill we learn what did just happened.
In this way, every loss is a lesson, a way to learn something new. Every loss make us more knowledged, more responsables, and more focused. Remember, there is no space for mistakes.

What's your thoughts?
  • #7
  • Aug 5, 2012 7:28am Aug 5, 2012 7:28am
My thoughts: You probably aren't a successful trader in the long term.
  • #8
  • Aug 5, 2012 7:54am Aug 5, 2012 7:54am
Quoting tunera
It is indeed a great thing to control the risk and lower the stress level, but is not soo good for a nice and steady growth of the account.
.
//---

hey tunera..... many systems will fail without a rigid stoploss but provide steady monthly income using one.....


one of the risks in publishing a systems trades is that if given enough trades, it's very rare we can not figure out the total system.... webbjeff, here at ff, has made his trade explorer available to all.....

it took a couple dozen trades to figure out his system and without a doubt his explorer results are accurate, meaning his system places all trades......

he uses 1 to 1 r/r along with a stoploss and actually has fairly steady growth....h
to trade and code, keep both simple... no call to impress....h
  • #9
  • Aug 5, 2012 9:53am Aug 5, 2012 9:53am
That's true many systems fail without an sl, and work well with it.
A good system produce a steady grow both with or without using sl (even if i never seen a "good" mechanical system is capable of survive in the longrun, nor i belive it even exist at all).
My point was not that if a system/trader use sl it cannot produce a steady growth, there was no point at all infact.
Just some thoughts about the subject
  • #10
  • Aug 5, 2012 10:49am Aug 5, 2012 10:49am
Seems to me your biggest argument against using SL is revenge trading. Well... then it is a easy solution:
Do not revenge trade!

Arctic4x
  • #11
  • Aug 5, 2012 11:31am Aug 5, 2012 11:31am
It's not about me, I've no problems in trading, just sharing something with you all, wish the best!
  • #12
  • Aug 5, 2012 12:30pm Aug 5, 2012 12:30pm
it's always a good discussion, and i find it has a lot to do with the psych makeup of the trader. There are multiple ways to control risk and it doesn't have to occur with a hard-stop. In fact...most of the issues I find unsuccessful traders have is they read in some snake-oil book/course/forum/etc that you have to have a tight stop and shoot for the moon. Well...if your too tight on the entry, your going to be taken out by noise - depending on the entry technique obviously.
I trade for a living and know some others who are quite lenient with their hard stops. Some i know like to hedge as it gives them a bit more freedom to wait and see who wins, and then cut/add appropriately. Some like an emergency stop for the freak occurance, and simply manage the trade after entry.
  • #13
  • Aug 5, 2012 12:47pm Aug 5, 2012 12:47pm
Has been many years that I do not use SL... but I do use hedge trades. My strategy is very simple without any indicators.

What I found during my many years of trading is that to make decent money I need to be in the market continuously. All my trades are with a hedge trade in around 30-40 pips and double the TP (I use 1H charts and trade with whatever trend I see in that chart in my monitor: I do not care of any of the past or pivots or anything behind the left side of my screen. I never look for unwinding those losses but instead look for new entries. It is amazing how easy is to make money/recover losses with those hedge trades later.

I do not worry about spikes or things like that. If trades are open when session is ending on friday... I usually close the open trades with no hedge with some small win or loss.

j.

.
  • #14
  • Edited 1:23pm Aug 5, 2012 12:47pm | Edited 1:23pm
Quoting qwerty00
it's always a good discussion, and i find it has a lot to do with the psych makeup of the trader. There are multiple ways to control risk and it doesn't have to occur with a hard-stop.
Fuck Forex Factory.Wake up people.
  • #15
  • Aug 5, 2012 2:58pm Aug 5, 2012 2:58pm
Quoting jeuro
Has been many years that I do not use SL... but I do use hedge trades. My strategy is very simple without any indicators.

What I found during my many years of trading is that to make decent money I need to be in the market continuously. All my trades are with a hedge trade in around 30-40 pips and double the TP (I use 1H charts and trade with whatever trend I see in that chart in my monitor: I do not care of any of the past or pivots or anything behind the left side of my screen. I never look for unwinding those losses but instead look for...
excuse me,but i dont understand what your saying.yes i understand using strong levels to allow for high % win rate and closing with larger losses when these levels get breached,but

how do you hedge a trade taking double profit when your floating loss equals your gain,and gaining more loss,do you then hedge the hedge,are you saying you always have long and short positions rolling.have you looked at the maths,its not possible over time.the only way is the stopping point.but if you dont and i dont know that,because its not definable,your riding luck.the next poster has a stopping point.i think.

maybe ive misunderstood somthing here,please enlighten

j.
  • #16
  • Aug 5, 2012 11:36pm Aug 5, 2012 11:36pm
I have started experimenting with pending orders in the other direction when my SL gets hit.

Basicly, I dont want that to happen, I dont want price anywhere near my SL, but if it happens, I have a pending order in the other direction which has a trailing SL. Whole risk is 3% with 2/3 of that being my initial position and 1/3 the pending counter position.
From going over my trade history, it seems like something worth checking out.

Anyone tried somehing like that?
Thoughts are things
  • #17
  • Aug 6, 2012 1:57am Aug 6, 2012 1:57am
Quoting tunera
Here we are on the trading with stoplosses, i've used to trade this way from time to time, especially in the previous month (july) i've decided to give it a try.

The results was very bad, the month did ended with a nice profit, however the profit/loss developement was something like: +2 -1 +1 -3 +4 -2 +1 -2 +3 -1 -3 +2 +1 -1 etc...
Of course trading is mostly a relative game, so there is not exist a CORRECT way of do it, i just tried to do my best, using a decent R:R ratio.
Interesting to see also that the higher the R:R ratio is, the lower...
how do you calculate your traded units if you dont use a stoploss ?

why do you enter a trade if you dont know where you gonna take the loss and mark it as a loser ?

in my opinion we tend to let a trade run and run and run if we dont use a stop, '' ouh shit, demand crossed . id give it another shot for the nxt demand, if this one doesnt hold i close the trade finally'' ... and so on.

Also if i wouldnt use stops ( whenever i enter a trade i place a fix stop and never change it afterwards ) i couldnt leave my pc screen until the trade is closed again.

some say brokers hunt stops, but do the broker really care about my 2-3 lots traded?
They dont.
Hick hack.

regards,
Jonas
Hero calls followed by margin calls...
  • #18
  • Aug 6, 2012 2:01am Aug 6, 2012 2:01am
Quoting Quezoy
I have started experimenting with pending orders in the other direction when my SL gets hit.

Basicly, I dont want that to happen, I dont want price anywhere near my SL, but if it happens, I have a pending order in the other direction which has a trailing SL. Whole risk is 3% with 2/3 of that being my initial position and 1/3 the pending counter position.
From going over my trade history, it seems like something worth checking out.

Anyone tried somehing like that?
Well all mathematical play-around. If you enter in the opposite direction after price action prooved you being wrong with the initially trade setup why entering in the opposite direction then? You dont have any trade setup/ idea behind this trade then. You just want to win back you losses. But what happens if your recovery trade will be a loser again ? Then you get into big problems...

''If you lose 50 %, you have to make 100 % to get breakeven again..''

Im not a fan of recovery trades at all... at the end, it's up to everyone herself, but imho you do need a special plan or idea whenever you trade a a plan.

Dont just say '' my long trade didnt work, so i go short and earn the money that i lost before,''

this wont work.


best,
Jonas
Hero calls followed by margin calls...
  • #19
  • Aug 6, 2012 2:23am Aug 6, 2012 2:23am
Quoting PhAnTi'
how do you calculate your traded units if you dont use a stoploss ?

why do you enter a trade if you dont know where you gonna take the loss and mark it as a loser ?

in my opinion we tend to let a trade run and run and run if we dont use a stop, '' ouh shit, demand crossed . id give it another shot for the nxt demand, if this one doesnt hold i close the trade finally'' ... and so on.

Also if i wouldnt use stops ( whenever i enter a trade i place a fix stop and never change it afterwards ) i couldnt leave my pc screen until the trade is...
Very interesting question, of course there is always a kind of "mental sl" (that can dist from price of 50pips 100pips 500pips depending on the market), however mental because is not much about if price reach a determined point, but HOW it do reach (is very overbought/oversold when reaching it? is a kind of fibo extension point? is very near a previous turning point? is reached during a corrective scenario or an impulsive one? etc. etc. etc.), so depending on the market conditions we may choose to close the trade (as if we have a sl!) or adopt another action (simply wait, or add a position)

That is what is missing in the sl approach IMO.
It's not only about price reaching a particular point, but how the market is once reached such point, sometime an sl does simply mean "take loss", sometime it really mean "stop loss", my thoughts about it is that if we take a loss only when is really necessary, and not anytime price reach a particular point, the account grow will be much more steady as we don't take many useless losses along the way.
  • #20
  • Aug 6, 2012 4:08am Aug 6, 2012 4:08am
Quoting tunera
Very interesting question, of course there is always a kind of "mental sl" (that can dist from price of 50pips 100pips 500pips depending on the market), however mental because is not much about if price reach a determined point, but HOW it do reach (is very overbought/oversold when reaching it? is a kind of fibo extension point? is very near a previous turning point? is reached during a corrective scenario or an impulsive one? etc. etc. etc.), so depending on the market conditions we may choose to close the trade (as if we have a sl!) or adopt...
imho it doesnt matter how price reaches the stop loss level, fix one or mind one, fact is that market prooved us wrong and we should close the trade.
Hero calls followed by margin calls...
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