Nice trading quote

[Iron]

'A perplexed person stands before two doors. One door says HEAVEN. The other says BOOKS ABOUT HEAVEN. What makes us laugh, I suspect, is that all of us feel the pull to pick BOOKS ABOUT HEAVEN.'

Pressfield, Steven

From the book Do the Work (an inspiring read for procrastinators, btw!)

[PeterLe]

'A perplexed person stands before two doors. One door says HEAVEN. The other says BOOKS ABOUT HEAVEN. What makes us laugh, I suspect, is that all of us feel the pull to pick BOOKS ABOUT HEAVEN.'

Pressfield, Steven

From the book Do the Work (an inspiring read for procrastinators, btw!)

I went to Waterstones on Saturday Jeff. I asked an assistant "Can you direct me to the self Help Section?" , she said "Sorry I cant tell you; it would be defeating the objective"!

[Zenyatta]

I haven't given up on trading, btw. I think the reason I haven't succeeded at trading is the same as the reason I haven't succeeded at dieting, i.e. discipline issues, which can and will be addressed.

The reason you haven't succeeded is that you keep trying to trade markets you don't understand. Unless you have a clear understanding of the characteristics of a market, you shouldn't be trading in it. Only trade when you clearly understand what is happening and why.

Incidentally, Buffett remarks are a good argument to go against the trends and avoid stop-loss.

No they aren't (unless you are a value bettor rather than a trader), although I can see the merit in opposing a market that appears to steamed further than is rational and is showing signs of weakness.

Jeff

Again, never stop-loss or follow a trend unless you clearly understand the market characteristics in question. If you stop-loss or trend-follow purely because you are following price action, you are on a hiding to nothing.

There is really only two types of swing trade:

(1) holding long-term value positions, or
(2) taking shorter-term speculative positions.

In neither case do you need to stop-loss in my view. Lets examine the two cases:

Case 1: If you are really confident of a trend, just ask for a few ticks in order to get matched quickly , and hold your position for the long-term. But if you are really this confident, and you are convinced value is present, you should disregard other people's opinions, so stop-loss is pointless.

Case 2: If you are not confident of anything, pick a selection and ask for a much better price - this is a speculative bet which will be matched less often . But in this case, since you are not confident, you should only put on amounts you are prepared to lose (since its speculative) so again, no stop-loss needed.

In neither case is stop-loss needed.

[Iron]

Zenyatta

Excluding break even trades, there are four possible outcomes to a trade:

A. Small win
B. Big win
C. Small loss
D. Big loss

Surely if you can eliminate D from the above, the small wins and small losses will cancel each other out, but you'll have big wins without corresponding big losses.

Have you seen this video by Peter on stoplosses? https://www.youtube.com/watch?v=D_XG61V1UXk. That video is a valuable contribution to the discussion on stoplosses, particularly as there were people who had previously argued stridently that no pro would ever use a stop.

Jeff

[Zenyatta]

Have you seen this video by Peter on stoplosses? https://www.youtube.com/watch?v=D_XG61V1UXk. That video is a valuable contribution to the discussion on stoplosses, particularly as there were people who had previously argued stridently that no pro would ever use a stop.

Jeff

I viewed the video. I think the problem for most people is not deciding where to set the stop-loss, the real problem was only briefly mentioned by Peter - namely that the assumption of 'randomness' is broken a lot of the time in the horse racing markets!

If you're dealing with a big feature race where there are long periods where prices are stable and the 'randomness' assumption holds, then yes, you can work the stop-loss no problem. But for a lot of the horse racing a lot of the time, the 'randomness' assumption doesn't work and the price jumps erratically around all over the place!

[Iron]

the real problem was only briefly mentioned by Peter - namely that the assumption of 'randomness' is broken a lot of the time in the horse racing markets!

The market can do anything at any time, but I don't see why that's an argument against stoplosses.

All you're doing with stoplosses is protecting yourself against huge losses.

As for the argument that the market can be very volatile, you can do what many financial traders do and adjust your stops to the volatility.

I think that the real, unconscious reason why you don't like stops is because it stings a bit to be wrong and lose money. Believe me, I know; we all want to feel that we can outsmart the market, and it hurts when reality bites. But if you can't handle losses and drawdowns, with greatest respect you shouldn't be trading. Until someone finds a way of predicting the market, they will go with the territory.

Jeff

[Zenyatta]

As for the argument that the market can be very volatile, you can do what many financial traders do and adjust your stops to the volatility.

No, I understand 'volatility' and the need to adjust the stops, that isn't my argument.

Please start Peter's video at 4.45 and play from there. He says 'Let us assume that the market is totally random...you will win 50% of the time, and lose 50% of the time...'

The reason stops aren't easy to operate that this assumption is false a lot of the time! There are systematic market behaviours which invalidate it.

Let me give you a simple imaginary example: suppose every 2 minutes before a horse race, Harry the bookmaker decides to hedge and dump a huge lay bet in...

Now suppose 'Newbie Jane' knows nothing about the markets, but had just seen Peter's lecture on stop-losses and thought 'great , sounds simple, I will invent a system where I enter every market 2 minutes before the off, and each time I will put in a back bet with stop loss in case the price moves x ticks against me'.

Jane would find that she loses 100% of the time and would soon be cursing Peter! - her system wouldn't work because the randomness assumption would be false - knowing nothing the market, she didn't realize that book-maker Harry was systematically dumping big lay bets in at the exact time she was entering the markets.

I think that the real, unconscious reason why you don't like stops is because it stings a bit to be wrong and lose money. Believe me, I know; we all want to feel that we can outsmart the market, and it hurts when reality bites. But if you can't handle losses and drawdowns, with greatest respect you shouldn't be trading. Until someone finds a way of predicting the market, they will go with the territory.

Jeff

No, see above - the reason I don't like stops is because the randomness assumption is false a lot of time. Unless you have studied the market and fully understand it's patterns, you will be caught out all the time, just like 'Newbie Jane' in my example above.

[Iron]

'Let us assume that the market is totally random...you will win 50% of the time, and lose 50% of the time...'

The reason stops aren't easy to operate that this assumption is false a lot of the time! There are systematic market behaviours which invalidate it.

Surely every time the manipulator moves the market against your random entry, s/he will move it in your favour. Unless you are using huge stakes, in a busy market the manipulators won't even know you exist!

If you have your stop too close to your entry point, you will get whipsawed to death by market noise and manipulation, but the solution is simple - use a wider stop.

Jeff

[Zenyatta]

'Let us assume that the market is totally random...you will win 50% of the time, and lose 50% of the time...'

The reason stops aren't easy to operate that this assumption is false a lot of the time! There are systematic market behaviours which invalidate it.

Surely every time the manipulator moves the market against your random entry, s/he will move it in your favour. Unless you are using huge stakes, in a busy market the manipulators won't even know you exist!

If you have your stop too close to your entry point, you will get whipsawed to death by market noise and manipulation, but the solution is simple - use a wider stop.

Jeff

I wish things were that simple Jeff. I'm not just talking about manipulation, I'm talking about non-randomness in general. Trouble is, every market is different, and unless you understand what sorts of non-random patterns are typical for the particular market you're in, you'll keep getting caught with your pants down

[Iron]

We're not going to agree, but it might be worth reflecting on why stops are so popular with financial traders, who operate in markets that are just as manipulated as Betfair's.

Yes, unless you have ridiculously large stops you will get stopped out regularly, but does that matter? Surely the only thing that matters is whether you make a long term profit.

Jeff

[Zenyatta]

We're not going to agree, but it might be worth reflecting on why stops are so popular with financial traders, who operate in markets that are just as manipulated as Betfair's.

95% of financial traders are losing money. Why? This is direct quote from Mugsgame to me: 'The number one reason day traders are losing money is their use of stop-loss'

Surely the only thing that matters is whether you make a long term profit.
Jeff

If things were as simple as stated in Peter's video it would simply be logically impossible for anyone to lose But the fact that almost no-one can make money out of it after months and even years of trying shows that the assumptions stated in the video are flat wrong or seriously incomplete under many actual real-world conditions.

Again, I think if a trader understands the market and knows how its supposed to behave, then they can apply the stop-loss no problem. But if the trader doesn't understand the market they're involved in, then stop-loss will be of little use to them.

[Iron]

95% of financial traders are losing money. Why? This is direct quote from Mugsgame to me: 'The number one reason day traders are losing money is their use of stop-loss'

At the risk of incurring Mugs's wrath, he's wrong. If using stops is a losing strategy for day traders, why do the top financial traders in the world use them?

Mugs doesn't use stops in the sense of 'when the market moves x ticks from my position, my software will close my trade immediately'. From his videos, he appears to decide with his gut when to exit a losing trade. However, he doesn't let a bad trade carry on moving against him till the off, so you could argue that he uses mental stops.

BTW, one of the reasons why financial traders use stops is to help with staking. If the market is at 10 when you enter and your stop is at 8, you can stake so that, if your stop is hit, you've only lost 1% or 2% of your bank.

If things were as simple as stated in Peter's video it would simply be logically impossible for anyone to lose

Peter isn't presenting a 'do this and you will never lose money' approach. His video was simply showing how you can prevent a small, manageable, acceptable loss from mushrooming.

Jeff

[mbailey1705]

One of my methods of trading pre-off on the horses initially involved my capturing and recording months and months of data before finalising the approach.

One thing it highlighted is that with this approach there is a clear point when a stop loss works fine. To be honest the overall performance with the stop in place in only marginally better than having no stop but even so it makes sense to use them as otherwise I would have to endure those horrid trades that go 15 to 20 ticks against you!

The data I recorded and filed confirms that the stop moves slightly for each odds range increment but there are clear patterns that repeat time and time again.

As Peter says, 'the sweet spot'. I know from my data that the sweet spot does exist.

p.s. its important to realise that this is based on me having a clear and defined point of entry whereby I have determined that the trade will go in the direction I expect. This is not based on a random selection.

So to summarise, stop losses make sense with my method of trading and thousands of rows of data on my trades proves that to be the case. I'm not saying they make sense in all cases, but in mine they certainly do.

[oscar123]

Whether you use a stop loss or not makes no difference in the long run. If you are a winning trader you will win with or without one, same for losing, the correct use of stop loss wont turn a loser into a winner.

The only thing that matters is that you are consistant in using it or not using it. Its the same with letting your trades go im play, in the long run it wont make much difference whether you do or you dont, so long as you are consistant in doing the same evey time.

[Iron]

One of my methods of trading pre-off on the horses initially involved my capturing and recording months and months of data before finalising the approach.

One thing it highlighted is that with this approach there is a clear point when a stop loss works fine. To be honest the overall performance with the stop in place in only marginally better than having no stop but even so it makes sense to use them as otherwise I would have to endure those horrid trades that go 15 to 20 ticks against you!

Thanks for sharing mbailey - That's really interesting.

Jeff