The stop loss lie

Chart Forum » Markets » The stop loss lie

«« Previous Next »»

Thread Start New Thread
Last Poster Posts Pages Last Post

Author

Message

jimdene

Member

Post Number: 145
Registered: 07-2005

Rating: N/A
Votes: 0


Friday, August 24, 2007 - 01:18 am:

I have lost heaps using the mandatory, "I must have a stop loss in order to minimise losses", because my god, every time I enter a transaction, lulls me into a false sense of security, hits my stop losses, makes sure I am out of the market and then happily rises back up.
I have fooled him this time, by putting my meager reserves into BHP and RIO and said, sod you, I will ride it out and for the first time I am in front

rdumas

Member

Post Number: 763
Registered: 11-2006

Rating: N/A
Votes: 0


Friday, August 24, 2007 - 12:08 pm:

Hi Jimdene,

Welcome to medium term investing. The next thing you'll do is learn fundamental analysis

.

When I traded futures during volatile market periods it was very stressful. During this recent market bashing I slept peacefully.

easymoney

Member

Post Number: 37
Registered: 03-2005

Rating: N/A
Votes: 0


Friday, August 24, 2007 - 01:45 pm:

The stop loss sure can drive you nuts, but trading without one is too close to russian roulette for me!

The only thought that might help is to think of it is a part of pre-planning a trade. You decide which direction the price will move. You decide your entry point. Some people set a target, but everybody should have an idea of how much potential for profit exits.

You should also decide how far it has to move the other way over what time frame before you will know you were wrong. The best time to do this is before the trade.

The key idea is to know how much money you are going to lose if you are wrong, how much money you are going to lose if something disastrous happens, and how much money you expect to make as a minimum if you are right.

(Message edited by easymoney on August 24, 2007)

Two of them say they're Jesus.
One of them must be wrong.

Industrial Disease
Dire Straits

maxboost

Member

Post Number: 170
Registered: 12-2005

Rating: N/A
Votes: 0


Saturday, August 25, 2007 - 05:46 pm:

Hi rdumas
I would have thought you would want volatile markets as a futures trader. As for fundamental analysis I haven't seen much done on this site.
have a good one.

captain_chaza

Member

Post Number: 2649
Registered: 02-2003

Rating: N/A
Votes: 0


Saturday, August 25, 2007 - 08:03 pm:

"Long live the Goose!" I say
It should be "Plain Sailing" from here on
I hope?
What is your SHORT TERM VIEW!

Please Don't give me,
"She'll be right in the Long Term?"
because of some simple lack of understanding or some cheap group of words to comfort those that are lost at sea

I am not as young as are others here at IC and therefore by definition I am "LESS PATIENT"

IRX

Salute and Gods' Speed

PS Please note that RIO raised the $41 Bln to cover/finance their $41 Bln fetish with Alcoa in minutes!

So, Where is this so called credit squeeze?

PPS: The Greatest Problem with "Plain Sailing" conditions after such a POOPING Of The Decks is to distinguish between

The GOOD, The BAD, and The UGLY?

This is not an easy task as nearly all look like diamonds in a coal mine ATM

"While we stop and think, we often miss our opportunity." Publilius Syrus, 1st century B.C.

"I believe the future is only the past again, entered through another gate."
Sir Arthur Wing Pinero 1893

"There are two times in a man's life when he should not speculate: When he can't afford it, and when he can." Mark Twain, 1897

captain_chaza

Member

Post Number: 2650
Registered: 02-2003

Rating: N/A
Votes: 0


Saturday, August 25, 2007 - 09:17 pm:

Sorry Jimmy Dean
I forgot to make my point in the above post

I Do agree with you re the Futility of Stop losses most of the time

I am OK with them If they can be kept to "Small"

If not I like to set about to "Averaging Down"!

I find this a very difficult tack and lots of considerations must be taken onboard

In an ideal world one would think you could average down once but I have found lately that 2 times is best

Salute and Gods' speed

PS I think they are designed to give the greedy CFD'ers a false sense of security

"Time Will Tell"?

rdumas

Member

Post Number: 766
Registered: 11-2006

Rating: N/A
Votes: 0


Sunday, August 26, 2007 - 08:40 am:

Hi Maxboost,

My futures trading ended in 2001 after some of the hairiest rides in the market that you can imagine. It was an extremely volatile period where you really needed to keep your wits and nerves about you. When I entered the quieter period of my life about2 years ago I decided that I needed a much less stressful life so now concentrate on medium term investing. It's much less stressful and very rewarding.

I'm surprised that you haven't noticed the amount of fundamental analysis discussion that we have on the "Our Daily Bread" thread.

resillent1

Member

Post Number: 185
Registered: 10-2006

Rating: N/A
Votes: 0


Monday, August 27, 2007 - 02:21 pm:

Without a quantitative point of knowing where you are wrong (stop loss) how do you go about determining position size and controlling risk.

This post is not meant to be an argument for using stop losses but a query as to how people go about managing their risk and setting their position size when not using a TA stop loss.

Cheers

Resilient

rdumas

Member

Post Number: 770
Registered: 11-2006

Rating: N/A
Votes: 0


Monday, August 27, 2007 - 02:45 pm:

Hi Resillent1,

I used to use accurate stop losses when I was a short term trader trading small numbers of stocks (or futures) at any point in time. Now that I am more a medium term investor I attempt to control my risk by running a portfolio of a minimum of 10 stocks initially but built up to an average of about 20 stocks.

The stocks are always selected based both on TA and FA grounds. From an FA perspective they have to have strong financial health, provide good value based on several financial ratios, good forward earnings estimates and relatively high liquidity.

From a TA perspective they need to be in a stage 2 Weinstein phase, have significant support levels not far beneath the present price action and not much overhead resistance. My reading of the overall market based both on fundamental and TA grounds needs to convince me that we are in a continuing bull market.

Based on the above parameters I know that my theoretical risk on an individual stock is a complete wipe out of that stock which represents a loss of about 5% of my working capital. On the basis of the parameters used to select the stocks that likelihood is quite remote and more realistically I could have a worst case scenario of a 30% drop in price of an individual stock which would represent an individual stock risk of 1.5% of my overall portfolio.

For that reason I can run quite large stop loss levels which allows a lot of lee way for my stocks to range in. It would take a significant change in the fundamentals of a stock for me to get rid of it. From a TA perspective I would allow a change in the share price of an individual stock fall around 30% for a short period of time (say a month) before becoming mildly concerned about it. I would give it time to recover. If it didn't do it in a reasonable amount of time I would get rid of it and get into a replacement stock.

eblode

Member

Post Number: 524
Registered: 11-2002

Rating: N/A
Votes: 0


Sunday, September 02, 2007 - 09:41 am:

Hi Rudy,
Back from Surfers Paradise and the storms of the past week.Did have time to read for the 4th time Stan Weinstein"Secrets For Profiting in Bull & Bear Markets". What puzzled me was his complete disregard for PE earnings.
Example after example he gives of low PE's and real disasters against high PE's and northbound profits. How different from yours and ODY's assessment. He has an interesting chapter on "shorting" in bear markets which I have never done. Have you? and is it too risky??. Your above comments on STOPS is very timely. I have neglected to do this in the past but feel I must be more careful in the future and place stops more accurately as a sneak "attack" from some direction can happen too suddenly in this present market.
Anyway I am looking forward to Monday and the announcement from GBG which caused a trading halt on Friday. Expect a lovely bonus on this one.
Great to be back in action.
Eugenio

rdumas

Member

Post Number: 779
Registered: 11-2006

Rating: N/A
Votes: 0


Sunday, September 02, 2007 - 10:52 am:

Hi Eugenio,

Great that you are back in the fray. It sure is an interesting period at this time but I strangely feel quite comfortable about it in spite of all of the bears about the place trying to scare the hell out of everyone.

Stan Weinstein is primarily a TA exponent and doesn't pay all that much attention to FA at all. In fact he does mention in his book that quite often the stock goes up for years in spite of very high P/E ratios. My experience is that there are many stocks in which the TA and FA are diametrically opposed and there is no doubt that to be in those stocks would be perilous. When however TA and FA both say the same things you get a very powerful combination.

I continue to use both in the market finding both to own individual strengths and weaknesses. Admittedly if I were banished to a desert island and was told that I could only have one of the two then I would chose TA. But since that isn't the case I will continue to use them both because in my opinion the more information you have about any subject the better prepared you are to benefit.

I only go 'long' in the market as most instruments that allow you to short are either leveraged or carry a time constraint. Super Fund regulations don't allow you to use some trading instruments.

msparks

Member

Post Number: 1067
Registered: 10-2004

Rating: N/A
Votes: 0


Sunday, September 02, 2007 - 09:47 pm:

Hi Jimdene
I am still trading the "mini" indices but with only a small amount of cash left , some 20% of the original small CFD trading account i set up.

Trading these is not at all easy and requires some trend following indicator, IG has a supertrend indicator which looks similar to an atr stop loss line.
I have found most indicators completely useless when trying to use tight "manual" stops, the spread on "GSL" Stops makes it too hard unless holding positions weekly or monthly and with the volatility, would probably be stopped out anyway,and to allow that much room would be too costly, even though the indices have been swinging back and forth, "which often would" allow recovery of loss's if one was game to stay the course.

My strategy now is to waite for a tight range, hopefully with a triangle pattern and take a position within the boundaries of the range or triangle.
If the trade goes into profit, i exit when the trend indicator reverses,if the trade goes against me,i submit a buy or sell for 2 contracts in the opposite direction, after the price moves past the range or triangle boundary, but i never allow the loss to be more than $50 regardless.

With only 20% of funds left, i am hoping this strategy will deliver some consistent results as my goal is to trade indices for income ,if if if i can get some consistent profitable results.
No more silly mistakes.

hilarius

Member

Post Number: 2879
Registered: 04-2004

Rating: N/A
Votes: 0


Sunday, September 02, 2007 - 11:37 pm:

I think successful index trading requires large capital, large risks and large rewards

It also requires a prohibitive amount of screen watching unless one is a young, healthy committed full-time or highly dedicated part time professional

There has to be a better way to live

With Best Wishes

Hilarius

I come in peace to share my thoughts and to shine my candle light on possible long term opportunities

tbreak

Member

Post Number: 117
Registered: 06-2004

Rating: N/A
Votes: 0


Monday, September 03, 2007 - 12:22 am:

Jimdene,

I feel your pain

My point of view on stops is that there has been a slight dis-service written about them in some books I have read. In the sense that I wish there was more on matching a stop up to the entry criteria, the plan to be traded, the time frame of your trade and the personality of the stock. It's an important subject yet I would like more information on all phases. Inital stop, trailing stop, when to bank some profits and time to exit on a given entry setup with explanation. I have some books that give the stop chapter the cursory it's to protect capital(2% risk of total capital), lock in profits and to do this we sell if it goes below a MA( eg 21 day EMA).

I generally run a 4.5 % stop loss on a average of a 2 day close on my entry but before I buy I check the stock against my stop. Some stock have no problems going below my 4.5% stop on my entry setup before reversing where others do not.

If you buy breaks over a high depending on your time frame it could need a different type of stop. Especially if you brought one that is in a large upward channel.You could face retracement back to the bottom of the channel.

Darvas would buy on breaks of highs and would set his inital stop as the previous low which could be a hell of a lot to give up on your first stop. (Google Darvas boxes)

I am happy that your now in front with rio and bhp but am a little concerned that you might not now have an exit in place. I hope that you might revisit your plan and work out a stop that can work for you.

rdumas

Member

Post Number: 781
Registered: 11-2006

Rating: N/A
Votes: 0


Monday, September 03, 2007 - 08:07 am:

The only index trading that I used to do was Futures (SPI) trading. I don't know what the stats are now but during my SPI trading days approximately 80% of traders lost their money, 20% either came out even or made money. Of that lot about half made money and the other half came out square.

I know that a very small percentage of the winners made heaps of money so if you make it you can give yourself a big pat on the back. Prior to the tech crash days I was in the top 10% and made money (not lots). During that volatile period of the tech crash I ended up pulling out with a small loss.

With those sort odds I classify it as gambling.

hilarius

Member

Post Number: 2889
Registered: 04-2004

Rating: N/A
Votes: 0


Monday, September 03, 2007 - 08:42 am:

Rudy

If in general an Index such as the XAO moves in the same direction as the quality shares which are included ... why should the index be less predictable than the quality shares?

I agree that the quality shares should produce a superior return

However, the direction should be the same?

With Best Wishes

Hilarius

I come in peace to share my thoughts and to shine my candle light on possible long term opportunities

rdumas

Member

Post Number: 782
Registered: 11-2006

Rating: N/A
Votes: 0


Monday, September 03, 2007 - 12:38 pm:

Hi Hilarius,

The stats that I quoted were given to me by a senior person in the company that I used to trade the Futures through. I can only tell you what the stats were. One big difference between trading futures and trading shares is there is no contract expiry date on holding shares. It's amazing how that single factor of time can make all the difference. Murphies Law dictates that the day after the contract expiry date the index will move in the direction that you were expecting. Unfortunately though by that time you have lost your money. With shares, provided they are good quality, all you have to do is wait long enough and they eventually end up going in the right direction.

The other thing is that when trading the SPI (I don't know if the figures are different now or still the same) each point was worth $25 per contract. When things are volatile as they were during the Tech crash you can very quickly be our of pocket $6,000~$7,000 per contract.

When you have bought a stock, the most you will lose is the value of the stock that you bought. When you are trading an index and things get volatile there is no limit to what you can lose at any one time.

When I was a professional punter in 2000~2001 only around 5% of punters made money on a regular basis year in and year out. Those figures were not all that different to trading the SPI. That was why I said that it was gambling. Naturally those few that do make a good living out of it would beg to differ.

hilarius

Member

Post Number: 2900
Registered: 04-2004

Rating: N/A
Votes: 0


Monday, September 03, 2007 - 01:37 pm:

Rudy

The Aussie 200 Index CFD has a $ 2 spread and no commission ... there is interest on long positions and interest is received on short positions

There is no expiry date

There is further no obligation to commit to more total risk than one would in an unleveraged instrument but as only a deposit is required the unspent funds above the deposit value continue to earn interest in your own bank account or other deposit facility

I, therefore, still wonder why getting the direction right would be signficantly different to getting the direction right for a portfolio of quality shares

In fact a portfolio of quality shares itself constitutes a mini Index

So a 500 stock index which moves in the identical direction ought to offer no trading disadvantage (other than perhaps a slower rate of gain or loss)

My point however is not the quantum of gain or loss but the ability to get direction right ... and that ought to be no harder

Given the fact of a small deposit the marginally lower rate of price growth should be well and truly offset by the higher rate of return on funds employed, and no greater element of speculation

Why would one be less confident in the DIRECTION of a top 200 stock index than a 10 stock portfolio when the DIRECTION of both is invariably the same?

With Best Wishes

Hilarius

I come in peace to share my thoughts and to shine my candle light on possible long term opportunities

rdumas

Member

Post Number: 783
Registered: 11-2006

Rating: N/A
Votes: 0


Monday, September 03, 2007 - 02:05 pm:

Hi Hilarius,

I don't know anything at all about the ASX200 Index CFD but from what you say it sounds fine. By a $2 spread do you mean that each time the index moves one point that you either lose or gain $2 ?? If so and there is no contract expiry date is sounds like it would be pretty safe to trade. I have been told by my accountant that CFDs are not an allowable trading mechanism in a DIY Super Fund.

It was my impression that CFD's used margin lending mechanisms. Is that not so in this case??

hilarius

Member

Post Number: 2902
Registered: 04-2004

Rating: N/A
Votes: 0


Monday, September 03, 2007 - 02:56 pm:

Dear Rudy

The $2 spread is the initial cost (and could perhaps best be regarded as a substitute for commission)

If you buy a contract for $ 6,269 your immediate sell price is $ 6,267 a loss of $ 2

Any subsequent gain is yours so if the price rises to a selling price of $ 6,279 that is a gain of $ 12 on the initial selling price and your gain is $ 10

If the price falls to a selling price of $ 6,266 that is a drop of $ 1 while you held and you lose $ 1 + the initial $ 2

In effect the "commission" is never more than $ 2

If $ 6,279 is what you would have been prepared to spend on a portfolio of stocks, then your risk remains limited to a gain or loss on $ 6,279 whether held in the form of stocks or an Index Contract

The benefit is that you only require a deposit of $ 62.79 just as you would only require a deposit if you bought the same value of individual stocks on margin

Forgetting the deposit issue your risk is the movement on $ 6,279 up or down

The fact that you only pay a deposit is in my view a benefit if you buy no more Index or Stocks with deposit than you would using a 100% cash outlay

It is only if you increase your exposure to more than you would normally risk (eg by buying $ 120,000 on deposit if you would only buy $ 60,000 exposure using cash) that you have (in my view) gone into a different level of risk

So I only think that leverage is an issue if I buy more on deposit than I would normally buy using 100% cash

I see getting the DIRECTION right on an Index CFD as conceptually no different to getting the direction right on an equivalent value portfolio of stocks

In practice it may be different due to psychological differences which are a separate issue

In fact there should be no difference in getting the direction right imho, even though the steepness of slope may differ

With Best Wishes

Hilarius

I come in peace to share my thoughts and to shine my candle light on possible long term opportunities

rdumas

Member

Post Number: 784
Registered: 11-2006

Rating: N/A
Votes: 0


Monday, September 03, 2007 - 03:10 pm:

Hi Hillarius,

Thanks for that explanation.

Cheers

Rudy

eblode

Member

Post Number: 525
Registered: 11-2002

Rating: N/A
Votes: 0


Monday, September 03, 2007 - 05:42 pm:

Rudy, thank you,
Just in two days you put PAID to 2 ideas that I was playing around with. The first was trading in Short selling and the other with playing the Index, up or down. After reading your comments on both these plays I decided to just forget the idea and save myself the aggravation cuz you already went through it. Had a great day with GBG cracking another winning day. Also my MGX is beginning to move. Now if IMD and CND wake up I'll be laughing. My NUF and SMX is going north nicely and of cause BHP is money in the bank. Let's go to 6700 -7000 before Christmas then it's champaigne all around. Thanks again pal,
Eugenio

rdumas

Member

Post Number: 785
Registered: 11-2006

Rating: N/A
Votes: 0


Tuesday, September 04, 2007 - 08:10 am:

Hi Eugenio,

Good to hear that your stocks are doing well. Whilst you were away I doubled my exposure to BHP and CBA and bought into my old favourite QBE. Needless to say that I'm happy about those moves. I just need the market to go down again so that I can buy some more

qed

Member

Post Number: 73
Registered: 01-2006

Rating: N/A
Votes: 0


Thursday, September 06, 2007 - 08:00 pm:

evening all , that example u quoted H is only if u take 1 contract, u take 2 contracts and ur profit or loss is double , if you are in losing possition your available equity also goes down , totally different to options where once u pay ur dues thats it , THERE is NOTHING as unerving as watching your a/c balance go down at the same rate as your margin ,sort of double dipping. Discipline is the most important thing with cfds xjo trading , if you cant take loss dont even start. Its no good setting auto stops imo if they are too close you will be churned out every time .. good fortune with it ... cheers Qed

Only $12 (USD) per month