tag:blogger.com,1999:blog-2676650858658561710.post2094876554597686079..comments2023-11-02T06:14:07.871-04:00Comments on Quantifiable Edges: Stops Part 1 - When Not To Use ThemRob Hannahttp://www.blogger.com/profile/07596674657839065754noreply@blogger.comBlogger12125tag:blogger.com,1999:blog-2676650858658561710.post-84269995435178115592009-01-26T09:32:00.000-05:002009-01-26T09:32:00.000-05:00Thanks for all the thoughtful comments. I'll addr...Thanks for all the thoughtful comments. I'll address much of what is discussed here in my next few posts on the subject.Rob Hannahttps://www.blogger.com/profile/07596674657839065754noreply@blogger.comtag:blogger.com,1999:blog-2676650858658561710.post-58384439175534366632009-01-25T21:51:00.000-05:002009-01-25T21:51:00.000-05:00An idea just came to me after my post today (where...An idea just came to me after my post today (where I thought not using stop losses is 'heresy' :) ). The use of options without stops is a viable idea. Just choose an option premium (assuming a debit position) that you are comfortable with, and then take zero as the stop loss. Say an option of $2.00 ($200 debit), would have a stop loss of $200, if it goes to zero. It can be left to expire worthless.DowCowhttps://www.blogger.com/profile/17041380021555581574noreply@blogger.comtag:blogger.com,1999:blog-2676650858658561710.post-81938166538144346892009-01-25T20:38:00.000-05:002009-01-25T20:38:00.000-05:00This piece on stops rings 'true' for me, based on ...This piece on stops rings 'true' for me, based on my experience but only if:<BR/><BR/>- you are not putting on too large of a position initially<BR/><BR/>- you are coming from a large cash position<BR/><BR/>- you are trading an index and not a specific stock. (this is important because a single catastrophic event in an individual name can wipe out tons of profits)<BR/><BR/>Of course, the selling in the past few months has redefined capitulative selling so that is tricky.heywallyhttps://www.blogger.com/profile/07629445075773561639noreply@blogger.comtag:blogger.com,1999:blog-2676650858658561710.post-44551268100418443072009-01-25T18:46:00.000-05:002009-01-25T18:46:00.000-05:00What? This is almost heresy to me. I don't trade...What? This is almost heresy to me. I don't trade mean reversal systems. So, given the tenets in your proposition, it seems reasonable - for that system. I know of a trader who used a successful mean-reversion system until the crash of 2008..... He is down 75%. It may revert back to the mean, but with much wider swings in equity.DowCowhttps://www.blogger.com/profile/17041380021555581574noreply@blogger.comtag:blogger.com,1999:blog-2676650858658561710.post-31320035162091893772009-01-25T11:35:00.000-05:002009-01-25T11:35:00.000-05:00Rob, I think a distinction should be made for stop...Rob, I think a distinction should be made for stops used in common stock/equities vs. indices and ETFs.<BR/><BR/>I am currently testing another mean-reversion system that trades on common stock. When the market conditions are ripe, this system may signal 1-6 entries a day, for several days at a time. The system will not take every signal but will instead run a final filter to decide the best of the candidates.<BR/><BR/>A percentage stop is used, which outperformed ATR stops during testing.<BR/><BR/>And here are my points:<BR/><BR/>1. The system creates positive expectancy. As you know, opportunity x expectancy = profits. Any positive expectancy system should theoretically hit an equilibrium where the reduced win% is balanced by the increased number of opportunites. The system will need to trade often to provide enough opportunity to overtake the increase in losing trades.<BR/><BR/>And that is why I mentioned the need for indexes vs. common stock trading.<BR/><BR/>The indices may not provide enough opportunity to overtake the losses incurred more frequently. Furthermore, while common stocks will sometimes go to zero, indices are less likely to.<BR/><BR/>Therefore, I can understand the argument that considers it a mistake to use stops on a MR strategy applied to the indexes.Jeffhttps://www.blogger.com/profile/03267918585202497489noreply@blogger.comtag:blogger.com,1999:blog-2676650858658561710.post-10825036210185080662009-01-24T10:12:00.000-05:002009-01-24T10:12:00.000-05:00I was curious to know if your trade became extreme...I was curious to know if your trade became extremely oversold like your example of a security dropping below $20.00 to $18.00 what the results would be to buy more of that security, future, at those extreme oversold conditions? This strategy has worked well for me. How often do your extremely oversold conditions continue to drop without a bounce, thus causing a possible wipe out?<BR/>Thanks!Anonymoushttps://www.blogger.com/profile/03026329084005149025noreply@blogger.comtag:blogger.com,1999:blog-2676650858658561710.post-24737098680872937322009-01-24T01:09:00.000-05:002009-01-24T01:09:00.000-05:00Doesn't Connor's have a rule that he never buys ov...Doesn't Connor's have a rule that he never buys oversold on a stock below its 200-day MA? So what happens if it falls below 200-day MA when you are in the trade?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2676650858658561710.post-35122587403809908042009-01-23T19:48:00.000-05:002009-01-23T19:48:00.000-05:00First, terrific post. My comment is that I believ...First, terrific post. My comment is that I believe most active traders discover this over time. The reason they don't work for them is because they already have a dynamic exit strategy as part of their trading methodology. For "buy and hold" investors, placing a stop may be their only planned method of exit, and thus enhances portfolio returns. Make sense? Rubbish? Have a good one, JeffJeff Pietsch CFAhttps://www.blogger.com/profile/08269888170503481402noreply@blogger.comtag:blogger.com,1999:blog-2676650858658561710.post-18715407484468420402009-01-23T16:42:00.000-05:002009-01-23T16:42:00.000-05:00Stops are a complicated topic. In mean-reversion s...Stops are a complicated topic. In mean-reversion systems, if prices move against you, then your system will tell you to increase your position size. Which works most of the time, but not when you are completely wrong (then it will lead to unmanageable losses). In a trend-following system, you should have a better exit strategy than stops. In both cases, if stops are improving your unleveraged profits, it means you didn't design your system properly. But in both cases you can get lower volatility with stops (which allows for more leverage or lower drawdowns). So stops will only actually improve profits if you have a bad system or if you use them to increase your position sizes.<BR/><BR/>jkwAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2676650858658561710.post-34896398756794532222009-01-23T13:03:00.000-05:002009-01-23T13:03:00.000-05:00I got burned several times, quite painfully on BSC...I got burned several times, quite painfully on BSC and UNG last year. One catastrophic loss is all you need to finish the game. Imagine what will happen if this position turns out to be temporarily correlated to another one or more, even though it normally does not exhibit such correlation...<BR/>No stops means VERY SMALL position size and a tiny expected profit per trade (assume<0.1% of your capital) so one's system must allow for hundreds of trades per year in order to make sense.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2676650858658561710.post-62278285917719897982009-01-23T11:44:00.000-05:002009-01-23T11:44:00.000-05:00I have to respectfully disagree with this post. S...I have to respectfully disagree with this post. Specific stop point can be determined by different measures of current market volatility. I actually touched on this subject this morning in relation to another position size. <BR/><BR/>One does not need to have a high or low in mind when placing a stop, just determine the market volatility and that should give you a good idea of where to place a stop.<BR/><BR/>I use this technique in one of my oversold/overbought systems. Without stops I have found that all my oversold/overbought stuff would eventually get wiped out.<BR/><BR/>This is what I have noticed from my studies.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2676650858658561710.post-55576195089125233752009-01-23T10:56:00.000-05:002009-01-23T10:56:00.000-05:00Thanks for the grat post Rob. This is a topic whi...Thanks for the grat post Rob. This is a topic which I have struggled with and came to basically the same objective conclusion that you did.<BR/><BR/>I would love to see/hear any more posts on this topicAnonymousnoreply@blogger.com