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Trade Trends with Bollonger Bands and Twiggs Money Flow

Do Stop Losses Really Work?

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Short Selling... what is it and how to do it...scarlettsmith69408-Jul-19  06:29 pm
         

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colin_twiggs
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I have opened this thread to promote discussion on this controversial subject addressed by Dr. Bruce Vanstone in Stop Losses: Help or Hindrance?.

Please try to keep an open mind. We are all likely to benefit from a careful examination of our assumptions and motivation for using stop loss orders.

Regards,
Colin


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pjf000
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Hi Colin,

It would appear from Dr Vanstone's analysis, that trading the ASX top 200 using the 60 day EMA to plot buy/sell signals works best (historically) with no stop loss.

This makes perfect sense and would not see the need for a stop loss when a cross down of the 60 day EMA gives you the stop/sell point to exit. If one was wanting a tighter stop then surely a shorter EMA (say 30 day) for the exit signal would serve the same purpose.

I suspect the need for stop losses increases proportionately to the decreasing value of the market cap of a stock.

Regards,
Phillip.







Markets can remain irrational longer than you can remain solvent

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ingot54
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Colin - Thank you for commissioning this article by Dr Vanstone.

I can not make my comment until I have read all three parts of his article.

The reason is that (having read only part one of the article) he seems to be making an assumption that the position will close at the set stop-loss level - eg his arbitrary 2% - 5% - 10% and so on. I see no provision in this first article for a scenario where price GAPS past the set stop-level, and keeps moving the position further into loss. I am hoping parts two and three may cover such events, at which point I may comment further.

This problems exists whether the trader/investor is long or short the equity/instrument.

I would be interested in finding out how, in his hypothesis Dr Vanstone accounts for gaps, or indeed - whether he thinks the issue has any statistical significance, given the rarity at which price actually does gap past a stop level.

I raise this issue because, while I have overcome this in my own trading strategy, I do think it needs to be discussed under the terms of reference of which you have commissioned the article.

While one individual equity disaster may not have much affect on a portfolio of equities, it may do so if another GFC scenario occurred. The maligned 'Black Swan' event actually could destroy a portfolio that was thought to be protected if price gapped significantly past a stop order.

Once price gaps more than 1.5% below a stop order, I do not think the broker is obliged to honour that stop, regardless of the price at which the equity eventually begins to find buyers/sellers. I may be incorrect in this - I seem to recall reading this somewhere, and would like clarification.

I am aware that Dr Vanstone's hypothesis is addressing a situation where normal price swings may not be unhealthy for a portfolio over time. However, current market volatility would seem to make a case for market participants to become more active in their portfolio management ... ie traders rather than traditional buy-and-hold investors.

Current market uncertainty is not conducive to the type of investing that Dr Vanstone appears to be addressing. Therefore it may well be, that the judicious use of stops might be more valid than the hypothesis seems to suggest.

Regards

Ivan


Keep Smiling - Don't look back

Hell, there are no rules here - we're trying to accomplish something ~ Thomas A. Edison

Never believe that a few caring people can't change the world. For, indeed, that's all who ever have ~ Margaret Mead


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colin_twiggs
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Ivan,

From what I have seen, Bruce takes signals based on closing price -- and the exit value is the Open on the next trading day. That would account for gaps.


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ingot54
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Saturday, April 09, 2011 - 07:33 pm:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)




colin_twiggs wrote on Saturday, April 09, 2011 - 06:01 pm:

From what I have seen, Bruce takes signals based on closing price -- and the exit value is the Open on the next trading day. That would account for gaps.




Colin - I don't want to be too pedantic about it, but:

1) Doesn't that make him a trader, rather than an investor?
2) Doesn't it assume the trader can get an "at market" fill at the open, and at the opening price?
3) Worse, doesn't it assume he is getting a fill at his percentage stop loss level?

Yes, it does account for gaps - but the actual "at market" fill may bear no resemblance to the stop loss price - ie 2% - 5% - 10% etc. The hypothesis breaks down when applied under live trading conditions, because no theory can account for liquidity issues in shocked/panicked markets.

I agree we have to deal in hypotheticals if we are to construct a workable approach to this. Dr Vanstone is probably satisfied that the issue is statistically, within tolerance for his hypothesis.

But given that a portfolio *should* involve a significant number of equities (otherwise what is the point of holding at all?) then it follows that in a rapidly moving, or *shocked* market, there may be such poor liquidity that the opening price bears no relationship to the sought stop loss price.

What I am saying is: the theorist can say the market "opened at $xx.xx" but because there may have been insufficient liquidity available "at market" for the parcel to be transacted, the actual selling/buying level might be quite another price.

I am prepared to move on from this in order to explore other ideas on it, but the problem remains - theory and live trading can differ widely in results, if only because of position size and liquidity issues, and because in a panicked market where stop orders become essential, the exits are usually jammed.

Regards

Ivan


Keep Smiling - Don't look back

Hell, there are no rules here - we're trying to accomplish something ~ Thomas A. Edison

Never believe that a few caring people can't change the world. For, indeed, that's all who ever have ~ Margaret Mead


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colin_twiggs
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ingot54 wrote on Saturday, April 09, 2011 - 06:33 pm:

1) Doesn't that make him a trader, rather than an investor?
2) Doesn't it assume the trader can get an "at market" fill at the open, and at the opening price?
3) Worse, doesn't it assume he is getting a fill at his percentage stop loss level?




1) Yes. But most of us are long-term traders rather than true investors who hold to receive income.
2) Yes. But the ASX opens with an "auction" so the trader can be confident of at least getting the open price
3) Far from it. In a weak market, price is likely to gap down; so the Open will be lower than the previous Close; and the previous Close will be lower than the actual stop level.

I will ask Bruce to review this thread and correct any misinterpretations from me. Far better you get it from the horse's mouth.


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bobov
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Porter Stansberry, in his S&A Digest, published results of an analysis of stops he commissioned. This study looked at trailing stops, not the ordinary stops discussed by Vanstone. Trailing stops under 15% produced worse results than no stops - consistent with Vanstone. But results got progressively better than no stops when trailing stops above 15% were used, peaking at about 34%. If this is valid, Vanstone didn't go far enough in testing stops, and failed to examine trailing stops.

Stansberry's work is copyrighted, so I can't reproduce it here. You can get permission at Stansberry & Associates, 1217 Saint Paul Street, Baltimore, MD 21202 or www.stansberryresearch.com.


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ten_black_donkeys
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This looks like an interesting exercise, but I would argue that the simple trading system used as an example has a built in stop loss already, but I suppose it depends on what you mean by a stop loss. I don't see how the moving average is not, in itself, both an initial and a trailing stop. The trade is going to exit when the price goes through it. The logic of the trade is presumably that if it stays above the moving average then that is bullish.

If you add an additional stop loss rule, then you are interfering with the logic of the trade, so it's not surprising that it gives a worse result.


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timely1
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Saturday, April 09, 2011 - 09:35 pm:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Colin

An excellent discussion.

The posts by the other contributors are quite revealing and I commend them for their thoughts.

I must commend Ivan on his comments re liquidity about stops and falling outside the gaps. Although what Ivan states is quite correct it may also depend upon your broker IMO as to whether your stops get filled in GAP situations.

While stops are an important tool it can be used with sufficient clout by the larger Trader to take a position in a Company by the very nature of calculating where stops would be placed (as in Ivans example of using percentages) and triggering those stops. Could this be construed that serious money wants that stock?

Guys a great topic for discussion and I look forward to it continuing.

Any chance of putting a couple of these questions together Colin and sending them off to Dr Vanstone for his comments?
Or maybe inviting him to join the discussion for a week?

Again congrats for opening pandora's box and mixing the real world with this excellent site.

Dave


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peter1
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I'm very disappointed with that "research".
The wrongly named "no stop" strategy has in fact a sell signal which is a trailing stop strategy. A real no stop strategy would be the value of the trades at the end of the testing period. I would like to see the daily mean returns and APRs of a real no-stop strategy compared to any stop strategy.

The only conclusion that can be drawn from the results is that the variable % stop losses have not improved the results of the original 60d ema trailing stop strategy.


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maximo
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Monday, April 11, 2011 - 03:34 am:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



I agree that the strategy tests do not use any traditionally set stop loss orders.
However there is a significant statistical difference between exiting at next Open
versus an immediate exit when a price level% is reached, this in itself can skew
results due to short lived price spikes and the Close price being more significant.

Though I do not disagree with the results. I question the generalisation of the
forum discussion point, "Do Stop Losses Really Work?". Perhaps it is merely to
invoke a response from the entire spectrum of traders, rather than believe that
they have no place in trading whatsoever.

In the context of a portfolio of stocks which all use the same entry and exit
strategy. Then yes, active stops placed in the market may not provide any gains
over not having them. This I know from my momentum portfolio, which has been
backtested and forward tested and traded for a number of years.
I also trade a strategy on the EURUSD, which does not have any active stops.

However I believe that using active stop loss orders is imperative for day
trading and short term trading. Most would not be profitable without them.
Even a longer term strategy can benefit from an initial stop loss order.
It all depends on the context of your trading plan or system.


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brucev
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Monday, April 11, 2011 - 10:38 am:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Hi,

I just thought I would clarify a few points that have been raised so far. Please forgive the length of this reply, however, I think it is important to correct a few early comments to allow for a more thorough discussion and understanding of the results.

1. There also appear to be difficulties for some with using the EMA as an exit rule. Please take the time to read and understand the explanation below, or you will not understand the significance of the result.

From the article:
"The majority of traders would be best described as medium to longer-term equity investors. In essence, this means that they trade ordinary shares, and aim to hold each share from several months to several years. Typically, this group of investors name themselves 'trend traders', and their aim is to identify and ride a trend for as long as possible. Often one or more simple (or exponential) moving averages provide entry and exit setups. Typically, this group also only trades the long side."

Firstly, if you are not a medium/long term trend trader then this information does not apply to you!

However, the classification of medium/long term trend trader appears to cover the majority of retail participants. In this case, the rules tested are a proxy for your real portfolio.

Or to put it differently, if you fit the classification of medium/longer term trend trader, then the stocks tested by the EMA rule are typical of those you would trade. You may have different ways of entering/exiting trades, maybe not even using EMAs, but thats not the point. You may have additional filter rules to enter and exit, but those filter rules are still applied to stocks that are trending. In other words, these trades tested would form the basic underlying set of stocks that you would have selected your actual trades from... otherwise, you aren't a medium/long term equity trend trader!

So... the idea is NOT to show anything about the EMA rules!

The idea is to look at the "characteristics" of the kind of trades which would be picked up by medium/long term trend traders!

Then inspect the character of these kind of trades... thats why it doesn't matter whether or not you agree the EMA is a suitable exit rule.

The issue is not about the rules, its about the character of the set of "trend" trades. The stop loss issue highlighted in these trend trades is a characteristic of the trend itself - trend trades carry this inherent character in their "DNA"!

I realize some people will still get hung up on this, but arguing about the exit rule is really moving the deckchairs around on the titanic.

If you have your own specific set of entry and exit rules and are an equity trend trader, then you can use exactly the same process I used to test whether stops are statistically benefiting your portfolio.

I challenged readers of my book to do this and to let me know if they found any equity trend-based system of their own that was improved by the use of stops. So far, the number of equity based trend trading systems where readers found a stop improved their system is 0.

The point of this article is to encourage you to test your own system. The EMA rules are an example for you to follow. Just replace the EMA rules with your own.

2. There is no assumption that a stop loss of 10% leads to a 10% change in final (closed) price. The data presented is what would happen if a trader held a portfolio of open stocks (according to the rules tested), and every time one of them had a price decrease of 10%, he sold it. The final outcome on each individual trade could be anything (even positive as the stock could gap up immediately after the 10% fall was observed!).

What we are interested in is not what happens to the stock, but what happens to the portfolio if the trader keeps acting this way! That is what is shown here. The majority of retail traders appear under the impression that what happens to the trades, happens to the portfolio. That is incorrect.

Good trading to all!
Bruce


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gdd3
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Monday, April 11, 2011 - 01:18 pm:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Just an 'interesting sideline'(well, I find it interesting) to this thread so far is that we have no less than 5 new members who have posted their 1st postings up here so far out of the 9 posters to 'comment' so far. Never, in my time on this forum, have I seen such an occurance!

Now is the (membership)'credit' to be given to Colin or brucev I'm not too sure!

As for the 'Pro's and 'Cons' of "Do Stop losses really work?", I mean that was the title of this thread, then I agree with Ingot's imput but would add that if you employ a stop loss strategy and are comfortable with it then don't be persuade by what others may "push in front of you".

...and as Brucev said... Good trading to all!

Dolphin}}}}


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gallifrey
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I feel that a significant purpose of stop loss orders has not been addressed in the research nor in the forum comments so far.

An initial stop loss is usually placed as a risk management control to "enforce" the 2% rule, i.e. to prevent a sequence of bad trades wiping out too much capital.
As such, I wouldn't expect the Stop to increase the probability of an optimal trade, nor to optimise portfolio performance.
Its purpose is simply an "insurance policy" to avoid a possible, even if unlikely, catastrophe.

For a trend trade that is entered on the crossover of the EMA, a trader should/would ensure the position size and entry price were such that the initial stoploss is below the EMA crossover, and so would not be triggered anyway.
I assume that this is not the Stop that Prof Vandstone is discussing ...but, for me at least, it's created some confusion.

"Ten Black Donkeys" (helluva pseudonym) points out that the trading strategy already has a stop built in - the EMA. And Prof Vanstone confirms that any trend trading strategy that is followed to its conclusion will always be stopped out. So including another stop, seems like trying to combine different trading strategies.

To me, the research shows that a strategy of riding the trend to the end is better than bailing out on drawdowns. But it does not support the conclusion that Stop Losses increase risk.


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ingot54
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Tuesday, April 12, 2011 - 10:36 am:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



The problem I see in using an arbitrary EMA cross as an exit strategy is that it does not provide for the preservation of capital in a way that serves the best interests of the trader.

That is to say an EMA cross is not a "thinking man's" stop loss, though as a trailing trigger to sell, it is better than emotion. (This is not the time/place to suggest other stops, but to focus on the actual stops used in the article).

I conclude this after extrapolating the natural diversion of two EMA's.
By nature of their construction, if daily closing price is static, then the calculus will tell us that the EMA lines will approach parallel.

But if the daily closing price is even mildly rising then the EMA's will be visibly and mathematically divergent.

A moment's thought will make this clear.

The choice of the 60-day EMA and the closing price was selected, according to the Case Study because "The majority of traders ... aim to hold each share from several months to several years."

Without presenting an example (experienced traders can visualise this already) quite a percentage of a successful portfolio may be destroyed before the 60-day EMA is activated - particularly following a strongly divergent closing price vs the 60-day EMA.

Although one does have to begin somewhere, I am wondering about Dr Vanstone's choice of "several months to several years" as an assumption for holding the portfolio.

The market activity from 2007 to 2009 might have caused quite a deal of capitulation, had no stop loss orders been used. And it is here that any hypothesis questioning the use of stop orders comes under scrutiny. This is particularly relevant, given that we are using "an initial starting capital of $1,000,000" since the year 2000 using ASX 200 stocks, and the massive amount of profit that would be lost in correcting back to the 60-day EMA.

A sudden correction in a steeply rising bull market wipes out a lot of gains when using a 60-day EMA as a stop. It is far less traumatic and dramatic when the market consolidates, and "allows the 60-day EMA to catch up" with the new levels, before any decline. And it is in this example, that arbitrary stops, such as the 60-day EMA are less efficient as a preserver of capital.

Although the purpose of this discussion is not to discover the "best" stop loss mechanism, it must be considered that the type of stops used will affect the "work or not" hypothesis surrounding stop loss orders, and thus the conclusion about using them. Dr Vanstone's use of the arbitrary 60-day EMA is pivotal to the conclusion to his hypothesis, and if there is any flaw in his selection of a stop, then this is it.

Consequently it may not be in the best interests of the trader to accept the hypothesis, without understanding how the conclusion was reached.

All roads lead to Rome, but not if you are a trader.
All stops eventually close a position, but not all stops - especially arbitrary ones - will optimally preserve capital.

Although I find the topic interesting, I feel we are at risk of following a tangent unless we are soon introduced to the next two parts of Dr Vanstone's report. Only then can we begin to draw any valuable conclusions from it.

After all - if I can not leave the discussion with something materially applicable to my trading, then I am really wasting my time. Academia has introduced many red herrings in the past - several of which have become mainstream (eg the 2% risk myth) - based on arbitrary concepts.

Having taken a swipe at that, I agree that the very nature of trading will always make it difficult to discover a one-size-fits-all approach.

Trading was never intended to be that. Trading is simply an exchange between two parties (and an excited broker!) The rest of it is embellishment designed to improve the outcome.

Dr Vanstone says:

In this series of articles, I would like to demonstrate the mismatch that stops appear to introduce, and show you a way to be able to test this for yourself.

I look forward to the next installment of the three-part series.

He says: In the next article, I will test percentage-based trailing stops and ATR-based trailing stops to see whether these types of stops can decrease the strategy risk.

Meanwhile, I am pondering whether Dr Vanstone would agree that there is a time to be out of the markets, as opposed to "buying and holding for several months to several years?"

And I ponder whether he will reconsider his hypothesis in the year 2015.

I am alluding to the volatility and uncertainty that is currently surrounding the world markets, and the ostensible failing of the world's reserve currency.

I am wondering if more "investors" are either quitting the markets, or becoming traders in the shorter time-frames.

Again - such things are tangental and off topic.


Keep Smiling - Don't look back

Hell, there are no rules here - we're trying to accomplish something ~ Thomas A. Edison

Never believe that a few caring people can't change the world. For, indeed, that's all who ever have ~ Margaret Mead


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ingot54
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brucev wrote on Monday, April 11, 2011 - 09:38 am:

The issue is not about the rules, its about the character of the set of "trend" trades. The stop loss issue highlighted in these trend trades is a characteristic of the trend itself - trend trades carry this inherent character in their "DNA"!

I realize some people will still get hung up on this, but arguing about the exit rule is really moving the deckchairs around on the titanic.




Bruce - in my last post, I show that I am hung up on this. The reason is that the point of exit (rule-based) determines the entire outcome of your hypothesis.

It must be considered.

I look forward to your treatment of other forms of stops, and the conclusions.


brucev wrote on Monday, April 11, 2011 - 09:38 am:

If you have your own specific set of entry and exit rules and are an equity trend trader, then you can use exactly the same process I used to test whether stops are statistically benefiting your portfolio.

I challenged readers of my book to do this and to let me know if they found any equity trend-based system of their own that was improved by the use of stops.




I would be interested to know the number of "several months to several years" traders, who bought your book, who:

* had an equity trend-based system of their own
* bothered to do the calculations
* bothered to get back to you if they did
* bothered to get back to you if they didn't (find an improvement)

I am wondering how frequently traders of these longer term time-frames would bother to shake themselves out of their buy-and-hold approach ... even if they could make more money.

brucev wrote on Monday, April 11, 2011 - 09:38 am:

So far, the number of equity based trend trading systems where readers found a stop improved their system is 0.




Is that because only a handful or readers of your book actually accepted the challenge?
Or is it because no one got back to you?
Or is it because, as you seem to be saying, no improvement was found through the use of a stop?

Again, the statistics need terms of reference to be meaningful - you haven't provided a database of respondents who read your book.

I am scrutinising this Bruce, not because I am being a thorn.

On the contrary - I don't have time to waste in devilment.

The outcome of this is intensely interesting for me, because I hope to obtain some applicable information that will make a difference to my trading income.

So far you have my attention.


Keep Smiling - Don't look back

Hell, there are no rules here - we're trying to accomplish something ~ Thomas A. Edison

Never believe that a few caring people can't change the world. For, indeed, that's all who ever have ~ Margaret Mead


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riobdrivr
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Tuesday, April 12, 2011 - 08:35 am:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



This has always been the problem within the investment community...someone tries to pass on info that they have worked hard on, with the idea that someone may find it useful...and they get the crap beat out of them.
I look at the sixty day cross as being a no stop strategy, simply for the reason that if one were to ride a stock down to the sixty day without selling then that person has joined the moron ranks.
The doctor is acknowledging that at some point you sell the dog. I believe he used the 60 day because traditionally the 50 day is the magic number. Most investors will wait to see if price bounces up off the 50 after a decline. They will buy if price crosses the 50 trending up. They will hold if it channels along the fifty.
All the doc is saying is this: Once buying a stock it is statistically better not to use any stop of <=10% up to a 60 cross. Yes, that does mean that a stop of 11% to 20%(?) has a good chance of riding out the storm and reversing before reaching the 60 da ma.
You can prove this yourself by back testing.
If you want to run a fun experiment, do this. Set up a portfolio of ten stocks with a ten percent stop. As(if) each stock gets stopped out,re-buy it the next day but place it in a new portfolio. Run both portfolios for sixty days and see what happens.
In the meantime let's make contributors welcome, because you can learn something from anyone.


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aggy
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I am very interested in this topic as I cannot seem to get my selling parameters correct. I have not been trading very long and I seem to exit too late or too soon!

I recently went through an exercise where I went through my past 25 trades looking at where I exited 'gut feel' versus: Exiting after two closes below the 65 day EMA and exiting after two closes below the 2 x ATR. (I assumed I could sell at open.)

The 65 day EMA exit was surprisingly twice as good as the 2 x ATR exit and much better than 'gut feel'. However if I had held on to all 25 shares, I would now be better off (the dogs would have been well overtaken by the stars).

I believe that I have to have a stop-loss, but where to set it is a mystery to me.


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lmt
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Interesting column, thank you for sharing.

The primary reason that a trader should use stops is to help to automate the trading process, and reduce or eliminate emotions.

The weakest link in any trading system is usually the trader's emotions.


By setting a hard stop before the trade is placed, in the system, this allows the trader to make an intelligent decision as to when to admit the trade is going against them, prior to entering the trade, and liquidate the position before it does serious damage to account equity.


If the trader has no stop, and relies on judgement to close a losing position, emotion may cloud the traders judgement and avoid liquidation, or worse, add to the losing position.


I too feel that the 60 day MA itself serves as a stop, and would be more interested to see the results using a dual Moving average crossover system as the trigger, or a simple x-day channel breakout system.

TO AGGY:

Where to set your stops is a crucial element in any trading system. You have to determine what system you want to trade, and pre-determine how much to risk in the event the trade goes against you.

Are you trading a mid to long term trend following system which requires wider stops, and smaller positions, a swing trading system, which has tighter stops and allows for larger positions?


The stop should be a mirror image of the entry. So a channel breakout entry, should use either a counter channel x- day breakout, an ATR stop or a fixed % stop. The type of system you trade should determine what type of stop to use.


A simple rule of thumb is to risk no more than 1 - 2% of your account equity on any trade. You have to size your position properly first, let your system determine the correct stop point, and then size the bet so that you stop will cost you no more than 2% of your account equity if the trade goes against you.


No matter how good your system may be, there is always the chance of a string of losing trades. You have to keep the losses in check and manageable to keep you in the game.


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maximo
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Correct me if I'm wrong here, but the strategy uses a single 60ema and a close above or below this. Any divergent behaviour of dual moving averages does not apply here. Neither does a lag of exit due to using only one average. You have to understand that an exit can occur on any single day bar. This observation can be determined from looking at the illustration of ALL in the report.

As far as destruction of a portfolio is concerned, if 1 stock out of 10 stocks was totatally obliterated to a value of zero then you would
still retain 90% of your capital. I believe distributing risk among 10 baskets is inherently safer than placing the risk in one.
Believe it or not, NO Stocks in the entire market were above a 200 period moving average during most of the GFC, let alone a 60 ema.

I do have an equity trend-based system of my own started well before 2008. That's not to say I did not learn any lessons from that
period in time. Fortunately for me I learned to trade with the longer term trend a long time ago.

Dr. Vanstone's book does sound interesting to me. If I didn't already have enough quantitative ideas to get me by then
I would probably get this to try and glean a few.


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lmt
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My point was that I would be curious to see the test of stops vs no stops applied to a system that used a dual moving average cross as the trigger then on a system that uses only a single moving average as the trigger.


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colin_twiggs
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Ingot & others,

I apologize for my earlier post which may have muddied the water a bit. I had 'flu at the time.

Bruce takes signals for the trend-following system based on closing price -- and the exit value is the Open on the next trading day. I am not sure how he measures the exit from stop loss orders and whether he allows for slippage.

(Message edited by colin_twiggs on April 13, 2011)


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colin_twiggs
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Thank you for all the interest shown in this topic. Developing a successful strategy for stops/exits is one of the biggest challenges facing many traders. I would like to summarize the main points so far, as Bruce cannot answer each post individually.

Bruce presented a typical trend-following system and asks whether this can be improved by the use of stop-loss orders. The first article in the series discusses initial stop loss orders, the second will discuss trailing stops, and the third uses Monte Carlo Analysis to review the results.

  1. The choice of trend-following system (with signals taken from closing price crossing the 60-day EMA) is arbitrary:
    • The discussion is not about whether this is an optimal trend-following system.
    • The example is chosen to represent a crude system, which should be easy to improve upon through the use of stops -- if they are effective.
  2. Would it be better to compare the use of stops to a simple buy and hold strategy rather than a trend-following system? Let's go back to the original question: can the use of stops improve the performance of a trend-following system? Comparing to a buy and hold strategy would answer a different question: can the use of stops improve the performance of a buy and hold strategy? Perhaps Bruce would consider a follow-up article on that subject.
  3. The type of stops used and their measurement was also questioned. Do they take account of poor liquidity, gaps, and other factors that undermine their effectiveness? While these factors would reduce rather than enhance the performance of stops, perhaps Bruce can provide more detail on this.
  4. A second, related issue is whether the test covered periods when there was high co-variance -- when most stocks move up/down together. Using the ASX200 from April 2000 to the end of 2009 should be sufficient. It covers both the dot.com and GFC busts as well as the boom period in between.
  5. Using wider percentage stops -- above 15% -- was also raised. While price would have to be a long way above the EMA for these to kick in, Bruce may wish to comment on this.
  6. An interesting point was raised about initial stop losses and the 2% rule: abandoning initial stop losses would affect your position size. The question arises from a misinterpretation of the following paragraph in the article, but raises an interesting question.

    quote:

    When benchmarking a portfolio, it is important to take account of the amount of equity used. In this case, a relatively simple 'percentage of equity' model is used. We allocate 2% of available equity to each trade, from an initial starting capital of $1,000,000.


    Most traders will allocate more than 2% of equity to a specific trade, simply because there aren't that many good trades available. They manage their risk by applying the 2% rule, where they limit the risk in any one trade to 2% of their capital. The problem when applying the 2% Rule is that your risk per share would expand if you removed the initial stop loss (it would not be affected, however, if you retained the initial stop loss but dispensed with trailing stops). I would be interested in Bruce's comments on this.



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rbbrain
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Hi,

As a technical analyst (chartist) I have a lot of trouble with anyone who uses a simple percentage based notion for a Stop Loss position. That is, placing a stop at some arbitrary percentage amount below the buy price (eg. 5%, or 10%, etc.). This is the first place that a lot of less-informed investors come unstuck.

If we study each individual price chart, and any chart patterns or consolidation areas, and notice an underlying Support level, then the calculation of a stop MUST be based on this support level. If there is no clear support level, then it is very wise to calculate a stop based on volatility (perhaps using ATR).

Happy to be proven wrong.

Cheers

Robert B


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colin_twiggs
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Robert,

ATR stops will be covered in Bruce's next article on Wednesday.

Regards, Colin


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lmt
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Robert, I didn't see anyone on this thread mention a fixed percentage stop as an exit.

The 2% rule is used to size the position based on the stop point. The stop is determined by the system the trader is using, whether it be a channel breakout, ATR, BB, or some other method.

Once the system dictates the stop point, the trader than sizes the bet so that if the stop is triggered, it does not cost any more than 2% of account equity, including commissions and slippage.


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colin_twiggs
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lmt,

Bruce allocates 2% of equity to each trade. He does not apply the 2% rule.


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lmt
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OK Colin, thank you for clarifying. By the way, the website and email alerts are top shelf...thanks.


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riobdrivr
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Please forgive me. I am going to break my own rule and be critical, but I just don't fathom what I have just read.
First of all, the picking of a stop loss using a percentage is not "arbitrary". It is a reflection of that individuals risk tolerance. It also should fluctuate with the cost of a stock. I might put a 20% loss on a $2 stock, but I would be a flaming idiot to put a 20% stop on a $100 stock.
I also tend to read my charts, but I consider any ma (3, 5, 7, 10, 21) a support level.
If my stock crosses below a 9 day ma and it is on its way to a 10% loss I get real interested real fast.
In the words of William O'Neil (founder of Investor's Business Daily)if a stock tumbles 20% in value it must recover by 25% just to break even. Do the math.
Don't know about you, but I am going to cut and run. Then I put that stock on a watchlist and if, in the future, it meets my parameters to buy then I will buy it once again. Otherwise, I will keep my capital working investing in good stocks. I am certain a stock broker coined the phrase time is money. And I don't have weeks and months to wait to see if a frog becomes a prince.
I am also bewildered by the the interpretation of the 2% rule posted elsewhere.
The 2% rule has utterly nothing to do with stops. It is not a means of "enforcing" anything. It means what it says...do not risk more than 2% of your total dollars on any one purchase. The correct interpretation is this...if that purchase collapses to zero, then all you have risked is 2% of your total account. It doesn't mean if your account is $10,000 then pay $200 for a stock then put a 2% stop on it. You put whatever stop on it that you feel like. Hell, put no stop on it. Your total risk is only $200.
It protects your total account from a total wipeout.

Also happy to be proven wrong.


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lmt
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Riobdrivr,

You are interpreting a risk based on account equity to mean risk per trade. The 2% rule means in a $1,000,000 account, the trade can not lose more than 2% of account equity, or 20K.

It has nothing to do with the percentage stop from entry to exit of a specific trade.

If you do not fathom the 2% risk rule that Colin referred to in his post, and that I also touched on, that is your view. I run a 100% systematic multi-market futures program that builds trades around risk per trade, as do most systematic traders.

The 2% equity - risk rule has absolutely everything to do with stops. It is a detailed discussion ...for clarification read any of Van Tharp's work or Larry Hite's interview in Market Wizards.

Position sizing is one of the most important aspects of successful trading, yet very few understand it or implement it. After you study this you will probably see things differently.

Good trading to all,

(Message edited by lmt on April 15, 2011)


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colin_twiggs
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This explains the 2% rule that LMT is referring to: http://www.incrediblecharts.com/trading/2_percent_rule.php


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rbbrain
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Hi lmt and riobdrivr,

Just reviewing the material that came out in the email on 9 April (Part 1 in a series of 3 articles) quoted as follows:
QUOTE: "When benchmarking a portfolio, it is important to take account of the amount of equity used. In this case, a relatively simple 'percentage of equity' model is used. We allocate 2% of available equity to each trade, from an initial starting capital of $1,000,000."

Firstly, I won't comment about the starting equity of one million dollars (which I think is a dream for many, but not all, traders, which might cause many readers to become sceptical about the usefulness of the research). But this reference to 2% of available equity has caused confusion which Colin has clarified above with the link http://www.incrediblecharts.com/trading/2_percent_rule.php .

The article then goes on to talk about "Initial Percentage Stops" as follows:
QUOTE: "Many traders simply use a fixed percentage to determine their stop level price. As an example, a trader might say, 'I will set a stop loss 5% below my entry price'. Here, we test every initial stop loss percentage threshold from 1% - 10% in steps of 1, for all the trades generated by the ema crossover rules."

Hence my earlier comments expressing opinion about the difficulty in accepting that this is a wise way to determine stops. Many of the successful and profitable traders that I mix with use stops based on the price action and chart patterns including recent support levels. If we stop to look at the chart patterns, and the true support levels, we might find that the distance below the current price is typically in the range of about 1.5% to maybe 10% tops. Think carefully about price movement as it swings up and down. Based on recent price volatility, it might swing within a range of 6%, so why set a stop at 5% below the price?

I think ATR stops (for Trailing Stops) are very useful and look forward to that article on Wednesday.

(Message edited by rbbrain on April 15, 2011)


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lmt
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Colin, excellent work.

Tharp, Tom Basso and others have done experiments using random entry focusing on proper position sizing and risk management, producing positive expectancy systems.

Many traders, myself included for the first 15 years, spend an inordinate amount of time on entry signals, when the money is actually made in managing bet sizing and risk.


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riobdrivr
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To RBbrain and Imt. I have been suitably chastised. I have been made aware of new thoughts...at least to me...and that is the ultimate purpose of forums. I will ponder further.
Thanks.


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lmt
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to Riobdrivr...no worries...that is why we are here, to share ideas with each other and learn.

Van Tharp's book Trade Your Way to Financial Freedom is an excellent reference for detailed discussions of position sizing, system development, and risk management.


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rbbrain
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*** Warning ***

Regarding Van Tharp's book Trade Your Way to Financial Freedom, I took this fantastic book as gospel for a number of years. But some of my more learned colleagues have suggested that I should not take everything in the book to be 100% gospel. There are some acknowledged wizards out there who have slightly different views to van Tharp.

Having said that, my own view (for what it is worth) is that most of the book is really good - especially regarding position size and managing risk. It is definitely worth having on the book shelf.

Cheers


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mosaic1996
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G'day Bruce V,

You say that your research is directed toward the longer term trend traders, and then you select a 65 day ema system that gives the following

a) average trade days around 21 days - hardly a long-term trend trader profile.

b) stop-loss step at 1% from 1% to 10%. Too small for a long-term trend trader. It is conceivable that a higher % stop could outperform your base system.

c) max drawdown of -34% for a system that has a (non-risk adjusted) APR of 2.63%. My understanding is that this system would have a negative risk adjusted retrun, i.e., a negative proper APR. Better off in a Term Deposit at 6%.

So we are using the analysis of a single system that no-one should use to determine if a percentage stop-loss can add value. This is a ludicrous proposition.

At least run a EMA system that is something that a trend trader may use, e.g., 42 week SMA (I'd prefer SMA to EMA) crossover, with a stops running from 10% to 30%, and maybe even 100% to see where the systems converge. I suggest 42 w as I am a Douglas Adams fan.

The most interesting thing about your research is that some trades lost more than 10% before recovering to be stopped out for less than a 10% loss.

Cheers,
Mosaic


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mosaic1996
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Bruce V,

I think that we have a terminology issue here.

I would argue that if you have an exit rule(s), then you have a stop.

Your simple EMA system has an exit/stop.

Are you arguing that a buy and hold strategy (entry only rule) would outperform the same system with a percentage stop exit system?

Cheers,
Mosaic


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ken
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Mosaic,

I would differ. In my terminology a stop is only one type of exit.

I have systems with 10 or more infrequently used exits, only one of which is a stop. To me a stop is falling to or through a predetermined level. My exits are more usually when a combination of indicators such as RSI, how much the stock moved in the latest day, or perhaps an index falling too far, occur together. They are usually biased to when a stock has gone up a fair bit rather than when it has fallen substantially - you make more money that way.


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engcomp
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For entry I use a cross of TMA (triangular moving average) by two consecutive closing prices. This is additionally filtered with considerations of momentum, cycles, support and resistance, and weekly trend on the principle that it is better to out, wishing to be in, than to be in, wishing to be out.
For exit I use a cross of parabolic SAR by the current price, i.e. I reset my stops daily based on parabolic SAR. I do not use the R (reverse) for entry.
This has worked well for me with both long and short positions.
The study is based on a simple cross of EMA60, which would include many trades my system would not have taken. The study, by using a fixed formula for exit stops, also ignores the benefit of closing in on the price action the longer a trend has lasted.

(Message edited by engcomp on April 20, 2011)


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mosaic1996
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Colin,

Would you select 5 days as an appropriate parameter for a trailing ATR-based stop?

Is so, why is the default 14 days?

I would argue that 5 days is way too short for a stop, and is bound to give the results that Bruce obtained.

This raises the question, is Bruce selecting methods and parameters that supports his hypothesis?

IMO, the examples detailed prove nothing as they are completely inappropriate.

Cheers,
Mosaic


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colin_twiggs
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Mosaic,

I don't think 14-day ATR will make much difference. Though we can ask Bruce if he ran other ATR stops besides 5-day ATR.

Regards, Colin

ATR14


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mosaic1996
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Colin,

It is a much broader issue than the short ATR period selected.

Do a test on a single system to draw a conclusion is not valid.

It is like saying that dog has three legs, therefore all dogs have three legs, or that 4 legged animal is a dog, therefore all 4 legged animals are dogs.

It is complete nonsense.

He could at least start with a system that has a higher return than the risk free rate of return, and preferable a system that better mirrors that of a trend jockey trader/investor as proposed. An average trade of 21 days isn't a characteristic of a medium term trend jockey.

I repeat, this research proves nothing.

Cheers,
Mosaic


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ehmu
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Wednesday, April 20, 2011 - 10:54 am:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Thank you Colin and Dr. Vanstone for the topic and framework. These principles are the heart of successful trading in the equity markets. I don't believe that exit strategies can be considered in seclusion from each other, I employ a upwards to four exit strategies in any given successful trade.


rbbrain wrote on Friday, April 15, 2011 - 11:32 am:

If we study each individual price chart, and any chart patterns or consolidation areas, and notice an underlying Support level, then the calculation of a stop MUST be based on this support level.




1) This inference by mr. brain is the essence of profitable trading. MINIMIZE THE RISK OF CAPITAL BY SELECTING LOW RISK ENTRY/EXIT POINTS ! In the event that someone can apply statistics to this principle, then beginners and veterans alike will make money. The style of stop used on entry of a trade ideally should be fixed, small, and hard wired.

The most money is lost by traders hanging on to their losers. (fearing the pain of loss, hoping for recovery). Most often this happens at trade entry, where the trader also doesn't want to admit that they were wrong. It hasn't been mentioned, but it is on trade entry where beginners absolutely require the protection of a stop to protect them from their own emotions.

The next most money is lost by traders selling their winners too soon. (relishing the good feeling of selling a winner). It is helpful in this case to have a stop take you out, rather than panic in a sell off.

At the levels in a price chart where there is very little price movement is where buyers and sellers agree on the price. There is no rush to get in on the gold rush, and there is no panic to be first to the exit. These are also the places where a trader has a little extra time to design their trade.

These are the areas where the lowest risk is present. If a person were to play a bounce off of one of these areas, their stop can be very small knowing that if it goes below that level that you were wrong about the bounce and your exit will be a minimum loss (risk). Same idea shorting at obvious resistance levels, if you were wrong about a price pulling back, your loss (risk) will have been small with a tight stop.

2) Once a person is in a winning trade, and if the developing trend is orderly (as in linear), then this is a good time to implement a trailing stop, or use a moving average break to exit. Personally, I like the 13ema, and the 34ema.

3) Once the price chart goes parabolic (very exciting), this is when an ATR or STD deviation exit strategy works great. If a trailing stop were used in this case, often premature exit happens and limits profits.

------The "Trading Action Zone" (TAZ) thread has a strong basis in taking breakouts from periods of low volatility. This is one of the main secrets to limiting risk and taking high probability trades.

Chart stolen from TAZ, shows a period of relatively low volatility at a particular support level.






_____ n a m a s t e

These musings are not a recommendation to buy or sell stocks.


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twuoti
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I have read all the contributions with interest and wonder how fund managers go about their business with regards to stops. I gave managed funds away as an investment vehicle when a fund manager said they would have done better except they were over weight in Sigma Pharmaceuticals.
So now I manage my own portfolio of stocks.
Can someone explain to me how you would have managed LEI and DOW I hold this stock.
Would the stop loss be set to take an enormous loss once it gaps down as it obviously misses the protective stop. I still hold these as do others who entered on positive performance data.


Bunter

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pjf000
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Both those stocks have been trending down for a long time (and well before the large gaps down).
Unless it is your strategy to only buy down trending stocks, a simple strategy of 2 moving averages would have gotten you out well before the gap down


Markets can remain irrational longer than you can remain solvent

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lmt
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to Mosaic...

I think you are completely off track here.

The idea of this post wasn't to represent this system as the ideal system, or a good system.

You are being very critical of the system, when the post is not about the system.

The post simply asked if stops helped or not, so a "random" system was used to measure stops.


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mosaic1996
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lmt,

The point I am making is that it is not valid (statistically speaking) to make the conclusion that Bruce is making.

Bruce is using statistically techniques, and should be aware that what he is doing is not valid.

It is ludicrous to conclude that stops can't add value on the basis of the result of a single system.

In additton, there is the possibility that the system and the system parameters have been selected since the results support Bruce's somewhat unconventional hypothesis.

Cheers,
Mosaic


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rbbrain
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Hi twuoti,

twuoti wrote on Wednesday, April 20, 2011 - 10:50 am:

I have read all the contributions with interest and wonder how fund managers go about their business with regards to stops.


At last week's Melbourne ATAA meeting we heard confirmation from our Guest Speaker (initials D.C.) that large fund managers can not be nimble and cannot dump stock in the same way that the rest of us will dump stock if our stop loss levels are triggered.

I am still awaiting positive confirmation from contacts and others who know better, but I suspect that the large fund managers base most of their investment decisions largely on fundamentals, "in the hope that" the stock will show capital appreciation. We know they will even buy a stock that shows a confirmed share price downtrend "in the hope of a turn around". And they simply cannot sell large amounts of the stock in a hurry without adversely impacting the share price. Well, many of us believe that that is speculating.

The other complication for many fund managers is that their documented portfolio strategy is to closely track a specific index. To do this they have to invest a specific percentage of their available funds into each stock in the index. They have little room to move on this. Otherwise they risk the possibility of achieving a return that is under the index. And this would be disastrous. So they simply can't implement a Stop Loss strategy.


twuoti wrote on Wednesday, April 20, 2011 - 10:50 am:

Can someone explain to me how you would have managed LEI and DOW I hold this stock.


The strict traders amongst us operate with the philosophy that before we enter a trade, we will determine the Initial Stop position, and if the price falls to that Stop level, then we will sell regardless. If the price gaps over the stop to a lower price, then we must sell asap at the current price. We cannot wait for the stock to "possibly" recover. We have seen too many stocks over the years continue to fall into oblivion, and take all the money. (Take a look at the large cap stocks that disappeared in 2008 due to the GFC - happy to provide a list.)

It is best to follow our strategy strictly and without emotion, and to exit the stock. The only way to remove emotion is to remove the discretion that too many traders use. Have a strict strategy, make sure the strategy is in writing, and action the strategy.

If we take one loss on LEI, or HST, then we are keeping the remaining capital for a better investment. BUT, if we find that the stock then tends to recover, and our Entry Criteria for a new trade is met, then we can re-enter the stock, and ride it upwards. If we simply hold on and "hope" that there are no more surprises with more downside, then we are second-guessing. This is dangerous.

And as pjf000 has said above, stocks do often provide some warning by falling somewhat before gapping lower, in which case if our Stops are appropriate, we could be out before the s*** really hits the fan (and watching the Volume can help to confirm - higher volume with falling prices is a good clue of something untoward afoot).

I hope this helps to add another view with some detail to the discussion.

Cheers

(Message edited by rbbrain on April 20, 2011)


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berretta
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Most of my best stop losses are profit targets.

Makes more sense to me in these volatile times .

Much less time consuming and keeps me looking ahead.

Suggest the proof is in how many times you can turn your capital over.

Think stop losses are fine if they create a new entry point which does not seem to figure in the conclusions of the original article.


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pjf000
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Wow!! I suspected stop losses were of no (or limited by pacifying the punter's nerves) value - especially when there were defined entry and exit points in one's system.

The amazing statistic (if I have understood this) is that there is a 97% difference between best and worst portfolio.

Although the MC Analysis only used 1000 positions (IMHO a lowly number for rigorous analysis) it still produced a huge variation from best to worst.

I suppose the varied results could change dramatically depending on the filters used to pick the portfolios in the first place and I suspect that the better the system (filters) for picking winners over losers in the first place, the lesser the variation of performance between best and worst portfolio. It may even be that the most optimal system (whatever that is or means) could actually have a positive expectation for greater returns with the use of some level of stop loss.


Markets can remain irrational longer than you can remain solvent

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engcomp
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Without knowing the entry and exit rules of the 1000 portfolios the study is meaningless. Assuming the entry rules ensure a win/loss ratio of 0.5 or better (the graph looks like 75% of the portfolios were winners), I would be interested to know the results if staged exits were implemented, for example 50% at 1:1 risk:reward, 25% at 1:2 risk:reward, and 25% at trailing stop equal to initial risk, which would put the first trailing stop at break-even when 50% is taken out and the second trailing stop at 1:1 when the next 25% is taken out.

With a win/loss ratio of 0.75 such money management should be highly profitable.


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engcomp
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The staged exit approach would also free up funds so that another position can be added to the portfolio, leading to diversification. If a study were carried out along these lines, it would show the optimum initial risk level.

I am curios how a 1% stoploss can have a maximum drawdown of 73.54%? Did the portfolio have 74 consecutive losses? Not impossible, but I would examine my entry rules after about ten consecutive losses.


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rbbrain
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I have a fundamental problem with the theoretical testing outlined in Part 3 which concludes that stop-loss orders may be hindering performance.

I mix with enough real professional traders that I can confirm that in practise a sensible Initial Stop Loss "position" is mandatory, and it is not based on a percentage amount - it is mostly based on the chart, chart patterns or recent price action. This is very difficult to program into any testing system.

Also, a Trailing Stop Loss "position" is also mandatory to protect profits.

I write "position" because the method in which a Stop Loss can be actioned is very variable - is it actioned on any price action below the stop, including an intraday spike? or is it actioned on end-of-day (ie. close below)? or as a weekly trader is it actioned based on the weekly price action?

The other over-simplified aspect of the testing is the arbitrary $10,000 position size mentioned for the testing. Most successful professional traders know that position size (as explained in some classic texts) must be variable and dependent on the "Amount at Risk" (the R value). This can make a big difference to profitability, draw down, win-loss ratio, and eventual equity amount. It cannot be ignored.

Sorry folks, but I cannot accept the conclusion in the published article, nor some of its underlying premises. I understand the desire to perform empirical testing in order to identify winning aspects of trading systems; but it is not a straight-forward matter. It is too easy to allow assumptions to impact the test results and conclusion.

But it is certainly good food for thought and further comment - especially from all the people who have some relevant experiences one way or the other which they can quote for us.

Cheers


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jaded
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I hope there is a follow up series of articles by Prof Vanstone on the subject of stop loss of Profits.

This series discussed above has been on the worthwhileness of various methods of Stop Loss on Initial Purchase as it affects a $1million Portfolio.This portfolio is made up of $20,000 parcels in the ASX 200.

Theoretically one would hold 50 shares [diversified] out of the ASX 200.Theoretically as each parcel=2% of total capital,one could LOSE the whole $20,000 and still be within the Classic Stop Loss Rule[of course the 2% Rule is 'backed' by a 6% Portfolio Loss "complication" I won't go into here'n'now]

Obviously Prof Vanstone's research and premise is mostly directed at Index based Funds unable or unwilling to invest outside the ASX 200.

Anyway,the premise is that a Portfolio of up to 50 shares is not more 'profitabl;e' if stop losses on individual shares is applied INITIALLY.By concentrating on individual shares initially purchased,the Professor doesn't cover Portfolio performance if 6/10 shares initially purchased are faced with a Stop Loss situation.

My query however is "What if Save Profit stops are employed?" and if as logic suggests Save Profit Stops are very necessary,what method does Research suggest by Prof Vanstone?

Further,If the Professor has been working with Institutional Funds,can he tell us What method do such Funds use to distribute their shares when such a Keep Profits point is ascertained?
Sell them all the next day?Sell some and 'hope' for a Price to be maintained for weeks and months so they can unload?

or Do they buy/sell by algorithmic? selling more than they buy?ie maintain price by judicious "small parcel" buying while being an overall seller?


" Hear what you Say...
But see what you Do!"

Sir Zelman Cowen c 1970.

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jdarn39
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I have always thought of stop loss similar to life insurance....protection from MAJOR declines.

Those who held on to a stock market ETF in '08-'09, only to experience a 50% decline would fear the stock market without at least a mental stop loss. Those who held on to the NASDAQ in '00-'03 lost up to 77% and have yet to recover.

The purpose of a stop loss, in my mind is sleep at night.


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qed
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Good Morning , What the good dr didnt explore, was the use of "support "lines as stop loss triggers. One could not use 10% on a stock like BHP which regularly reverses to a support line . Different stops for Different Stocks...he cannot just say "use 10%" across the board for eg 10% on BHP @$49.55 would be ridiculess but 10% on CSR @$2was a must have Cheers


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colin_twiggs
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QED,
Support levels are difficult to program unless you use Donchian channels (e.g. a 30-day low) as a substitute.


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qed
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Colin , hello again ,, I didnt realise support and resistance had to be programmed as such , IF u used support and resistance levels as stop loss with some stocks like bhp the lines work well .imo ... my posts seem to have gone to a seperate thread ? cheers Q


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colin_twiggs
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Jaded,

Please define Profit Stops as opposed to Stop Losses. Are you referring to a rule where all positions are closed if 6 out of 10 stops are hit?

Regards, Colin


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ehmu
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It is probably an imposter.

If it were jedad the speak would be in monosyllables alternating with expletives.




_____ n a m a s t e

These musings are not a recommendation to buy or sell stocks.


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jaded
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Colin- A Save Profit Stop is a Hold share of some time duration that is in substantial Profit but appears to have Peaked in Price,giving a Reversal Signal so you Sell to capture the Profit.

On a Portfolio of ASX 200 shares perhaps a Event affecting the General Market occurs,one holds a Portfolio of Long Held Shares in Profit so one faces Liquidating all your Holdings to Bank Profits.[doing an Ody ]

Save Profit Stops are the equivalent of Stop Loss.
Use the same methods often[percent retrace;ATR etc] or does the Professor advocate that no share in a ASX200 portfolio EVER be sold for profit taking purposes?

So basically I'm wondering on the Professor's position on backtesting Portfolio Affect of Save Profit Stops in individual shares of a Portfolio.

Further I'm pondering regarding "pure Stop Losses" what happens to Portfolio Performance if say 6/10 initial purchases go Loss and one follows the professor's theory?
Say buying in Early Feb or April this year?
or LEI on the 60/150 cross up October last year?


As others have pointed out d'Vanstone Research has centred on shares recovering quickly from Stop Loss positions.Not enough work done on Shares in a Portfolio going into an extended Downturn.

Money Saved is Money Earned and Losses Stopped and Profit Saved is the method for applying this to a Portfolio.

At least when it's Your Own Money and Not some Uni Graduate desk jockeying it for you on commission according to some academic,back tested 'system'.

Prof Vanstone what does a Institution touting itself as a Momentum Player in ASX 200 do when the Momentum obviously Peaks and dissipates back to Average?Sell on what signal?
Take Profit or Hold thru any obvious Loss on "paper"?

Colin.I'm concerned that these Articles may not have been fully comprehended and that some browsing reader may have only taken in that some Professor thru backtesting has 'proved' that Stop Loss is a worthless concept and should not be employed.
It may not have been understood by such casual readers that he was applying this 'concept' only to
ASX 200 shares,held at 2% individually of total Capital,using examples of Stop Loss points being hit soon after purchase and then 'recovering'.

The parameters set of 2% single position and the circumstances of buying High and then facing a significant retrace to the position maybe to never return to the Buy Price for YEARS have not been addressed.

Probably because of each position only being 2% of Capital.
I do not believe in the Real World a Individual with 1 million buck$$ to invest would take 50 out of the ASX 200.

To me the Vanstone research is purely of Institutional "benefit" to justify them doing nothing to EARN their client's money merely reassure clients that such institutions have a Back Tested System endorsed by Academia to justify their bleeding Commissions.

Summary- Stop Losses use the same concepts as to Save Profits.Stop losses are a Real Way to adopt the concept of a Penny Saved is money earned.
New or amateur 'investors' could be misled by these Vanstone concepts.They merely have to take say take 10% of Capital single positions outside the ASX 200 or even only within it to unbalance the Professor's hypothesis.


" Hear what you Say...
But see what you Do!"

Sir Zelman Cowen c 1970.

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colin_twiggs
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Jaded,

Thank you for the explanation. Bruce did test Trailing Stops (Percentage and ATR-based) in article #2 of the series. They perform the same function as a Save Profit Stop.

Please note that he is not advocating a buy-and-hold strategy; merely suggesting that stops do not enhance the performance of trading systems like MA or Momentum. A secondary point is that tighter stops do not mean lower draw-downs.

The research, however, does not examine the link between initial stop losses and the 2% Rule. As you pointed out, Bruce sets a maximum exposure of 2% of capital for each equity -- that is different to the 2% rule where maximum exposure may exceed 10% of equity. Abandoning initial stop losses would affect your position size if your are following the 2% Rule.


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jaded
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colin_twiggs wrote on Monday, May 16, 2011 - 01:35 pm:

Bruce did test Trailing Stops (Percentage and ATR-based) in article #2 of the series. They perform the same function as a Save Profit Stop




yes Colin and he concluded [I think] that ATR stops also did not enhance portfolio performance.
Do tighter Hold Profit stops mean greater "Take Outs" if

colin_twiggs wrote on Monday, May 16, 2011 - 01:35 pm:

A secondary point is that tighter stops do not mean lower draw-downs.




Colin,is Prof Vanstone going to contribute a further series of articles on the subject of When to Sell? What system to use for Profit Taking now he's demonstrated no use for various Stop Loss methods?
Has he incorporated into his study ASX 200 shares falling in price significantly below 10% of purchase price like LEI and TRS and effects on portfolio performance?


Colin,to me he has dismissed using popular Stop Loss points and by doing so has left dim use of profit save methods so what is his position if not BHP?
[Buy/Hold/Pray?]


" Hear what you Say...
But see what you Do!"

Sir Zelman Cowen c 1970.

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colin_twiggs
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Jaded,
Bruce still uses a general stop loss, closing all open positions when the market turns negative. Porter Capital state:

quote:

Our MTM portfolio moved to 100% cash on 4th May 2011 when market momentum turned negative. The ASX 200 has fallen over 13.3% since then.


I understand from Bruce that a raw Momentum trading strategy, without stop losses, produces better returns. But draw-downs of up to 75% would cause most investors to throw in the towel.


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seahound
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Carla Cavaletti wrote an article “Turtles on The Move” in Futures magazine Vol 27 No 6 telling:

“Many turtles claim the biggest reason they no longer tolerate immense drawdowns or strive for colossal returns is because customers want a more conservative approach. Most say striving to meet this request has been the biggest challenge. “


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jaded
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Monday, August 15, 2011 - 10:05 am:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



If Bruce does some more articles for you Colin,perhaps you should "monitor" the titles of them.

Bruce writes from an aspect of study for Fund Managers,the theory of Fund Management.His findings such as on whether Stop Losses Really Work are not really applicable to the average,retail,DYOR Super individual.

Bruce's "studies" are limited to Momentum shares in the ASX 200.He further expounds that only 2% of capital be in any one share so theoretically his "Fund" buys 50 shares out of 200 on the criteria presumably the 50 are the leading Momentum shares of ASX 200.
By advocating No Individual Stop Losses,it appears no criteria for Loss of Momentum Sale is put in place but rather the Fund sticks with the particular share/shares/50 out of 200 until the whole index indicates a turn of momentum and the Fund is Sold Out.

Now that's a fine and dandy Theory for Funds.It's a contrast,progressive theory compared to buy the Whole Index,re weight on Ranking Changes and generally be fully invested/ at all times Buy and Hold.
I'm sure the Finance students find this an exciting theory and concept

but Colin I think that with this Forum's "Agenda" of being for the small investor/trader wanting methods to do investing yourself that any future Bruce Articles highlight they are Fund Manager Theory geared towards 'controlling' returns on Millions of $$$ of Capital and are high faluting justifications for earning Commissions.

happy trading


" Hear what you Say...
But see what you Do!"

Sir Zelman Cowen c 1970.

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colin_twiggs
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Monday, August 15, 2011 - 03:55 pm:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)




jaded wrote on Monday, August 15, 2011 - 09:05 am:

Bruce's "studies" are limited to Momentum shares in the ASX 200




Hi Jaded,
Bruce's study used Moving Averages rather than Momentum. "The results indicate that no benefit has been obtained from any of the stop combinations" is a valid conclusion. But as pointed out earlier, the study limits the position in any one stock to 2% of capital. This would exclude most private traders, who use the 2% Rule. They limit the risk in any one trade to 2% of their capital, by applying an initial stop loss, while their actual position in the stock may be substantially higher. For example, if I buy BHP at $45 with a stop loss at $42 and my capital is $100000:
  • Bruce's study would restrict me to 44 shares @ $45 = $1980;
  • By contrast, the 2% Rule would allow me to buy 666 shares @ $3.00 risk per share = $1998.
Regards, Colin


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spdfgh
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Saturday, December 08, 2018 - 02:46 pm:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



There's too much to read in this thread for now but i will go through over time.
Just found this interesting video on stop loss determination:
https://vimeo.com/205156270


Just another potato.

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spdfgh
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Friday, December 28, 2018 - 02:08 pm:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



I'm more interested in stop loss in relation to holdings for dividend incomes.
For example; a holding in CBA for dividend income (example current 120K holding giving a div. income of around 3 to 3.5K (currently), paid every 6 months over period of holdings 21 years originally bought at around $10 per share).

How would you apply a stop loss when the price drops from $90 to the recent low of $65 amounting to a loss circa 40K, when collecting dividend for income. Or do you revert to Dividend reinvestments at a certain point?

What is the best way to establish the level of a stop loss when the income you collect is far less then the capital loss accrued? and to what amount do you sell; all or part not knowing how far the price of stock will drop?

Is the stop loss actually the amount collected P/A in dividends 6 to 8K? sacrificing all future dividends? Or would you draw down holdings to what level?

Or do you in fact hold through any market downturn to continually collect dividend incomes, not knowing at which point you might have to sell out completely?

I would like to work out some kind of ratio to monitor and measure various company holdings in relation to dividend incomes and stock market draw downs in relation to different levels of company holdings, but simply don't know where to start.

Has anyone here encountered these types of stop loss problems?







Just another potato.

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pjf000
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Friday, December 28, 2018 - 02:36 pm:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



You could work out a "sell" point formula and use a trailing stop to trigger the sell point. To do this you could use a combination of TA methods and backtest the strength of such a method, or you could just subscribe to a system whereby all the work has been done for you.
One that seems to be as good as any and fairly resilient in volatile times is Share Wealth Systems, but DYOR.
In your short selling post, you really need to get a good understanding before embarking on that side of the market (imho).


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