Wide Stops:
Does this sound familiar - "I've had on too many times the market pull back on my stops only to find that it went on to do what I thought it would. Nothing more frustrating on being stopped out again and watching trade move on to my target but without me. I do admit the financial risk is higher with wider stops. But expecting the market to move fast every time in my desired direction with out much breathing room is a lot to ask"
The above is the most common reason I hear for using wide stops. Another reason is common assumptions like "Avoid account death by 1000 cuts; or small stops are for amateurs;" etc.
Contrary to popular belief, I think wide stops are actually more suited for experienced traders and not for beginners. Wide stops work if the trader is really patient in choosing trades, good at reading context and direction of trend accurately and in detecting quickly when a move is false . Also has strong confidence in their analysis to hold when market goes sideways or bit down after their entry. Does that sound traits of a beginner? Otherwise wide stops are the quickest way for beginner to blow out their account no matter who says they are best.
Tight Stops:
Does this sound familiar - "A trade should work immediately and profoundly. Best trades work right away. There is always another train coming. Focus on your risk and profits will take care of themselves."
My personal preference is towards narrow stops (coupled with time stops). This does not mean I think narrow stops are best of all three. It just means I am more comfortable trading with narrow stops. What would be bad though is someone discarding this choice without investigating because they heard/read something like "small stops are sure way to loose account" or "amateurs use small stops and professionals use wide stops" etc.
Unfortunately I think narrow stops are also more suited for experienced traders over beginners i.e., for this type of stops one needs to have lot of patience to wait for really great location and not over trade. Similarly be quite good and confident with their timing, quite good with letting losses not affect psychologically and most importantly not lose balance because of missing great trades (which happen more frequently with this approach). That is not easy and does this sound traits of a beginner? Otherwise narrow stops are sure way to blow account by 1000 cuts.
No Stops:
Take any trading system and compare its performance with and without stops. Or how about write a simple reversion or breakout system and back test it with and without stops. More than likely the performance is better without stops and also often a losing system with stops becomes profitable without stops. Does this mean using No stops is better?
I think one will find strong proponents of this approach more in automated trading. I don't have lot of experience on this front. Some common risk management approaches without using stops I have seen are like using options to manage risk or using account performance profile to cap risk.
If you know of any good book or article that talk about various forms of risk management without using stops then please let me know. I appreciate it.
So what's the point?
I wish I could say there is one type that fits all. So I feel the next best thing one can do is to pick one style that feels comfortable, stay long enough to become good with it and ignore what others say. For example, if it is wide stops that resonates with one's nature, probably first thing one needs to become good is like identifying context and trend direction correctly etc as mentioned under Wide stops. Same for other types as listed under respective sections. Later on, once someone becomes good, they can mix and match like wide stops as catastrophic net or selectively apply type of stop based on setup etc. The above are just my opinions.
So what's the point?
I wish I could say there is one type that fits all. So I feel the next best thing one can do is to pick one style that feels comfortable, stay long enough to become good with it and ignore what others say. For example, if it is wide stops that resonates with one's nature, probably first thing one needs to become good is like identifying context and trend direction correctly etc as mentioned under Wide stops. Same for other types as listed under respective sections. Later on, once someone becomes good, they can mix and match like wide stops as catastrophic net or selectively apply type of stop based on setup etc. The above are just my opinions.
I hope you enjoyed this post. Please feel free to share the post and also let me know your opinions. The more different opinions from above the better.
"By three methods we may learn wisdom: First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest" - Confucius
1 comments:
Good post I was just googling about this topic and landed here. I'm struggling right now w/ a momentum position trading system, and very wide, or even non-existent stops seem to work best. Anything else I add to the system reduces returns and doesn't really help risk metrics much. The best trade exit I can find is also a simple time based exit. You'd think it'd be easy to construct a better exit than "exit this trade in 3 / 6/ 9/ or 12 months", but it's proving difficult.
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