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algo developer/trader mentor of mine insists that “70% of all intraday trades that get stopped out retrace eventually

(Last Updated On: October 17, 2011)

An algo developer/trader mentor of mine insists that “70% of all intraday trades that get stopped out retrace eventually. So, stop losses do not really stop losses. Rather they create them.”

So for those who trade without (intraday) stops, what other approach do you suggest to avoid catastrophic losses and reduce risk of ruin?

 

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You answered your own question. If you need a stop to prevent a catastrophe, then place it far enough not to obstacle your trade. If you’re going to use stops as a money management tool then most likely you will be stopped out too often. Try looking at some recent threads in this group, there have been quite a few discussions on the subject recently.

Also be aware that some instruments like ES for example are of mean-reverting nature, and for them this saying is true. But there are others, for which it is wrong. So, don’t take anyone’s words too seriously at once. Do you own research.

 

Sorry, I DO use stops and I have to agree with your mentor on the “create losses” point. A stop hit creates a debit in the account. Its a point in which the question of whether or not this trade worked or not. What would you like a “known” or limited loss or an unlimited one?

As far as the 70% figure, it seems a bit imprecise, what is his/her definition of retrace? just back below or above the stop point or to a point allowing a profit to be realized?
“retrace eventually” ahh within the same intraday session or interday? If one can hold on for years its possible for that to occur but keep in mind the traders who traded the S&P 500 and went short at the 666 low in 2009 and didn’t have a stop in are still short about 500 points later or $125,000/full snp contract.

Unless your dealing with unlimited funds(I’m def not 🙂 ) it seems prudent to place a limit on what risk your willing to take. The saying: “Markets can remain irrational longer than you can remain solvent.” — John Maynard Keynes, comes into play.

On a more serious note, use of options rather than hard stops or spread trading might be advantageous. but there is a cost for this “flexibility” in the case of options. If your trade is profitable your sitting on a less profitable option in most cases. That’s my 0.02c, interesting question I hope to hear more enlightend responses from others.

 

Let’s think this through – that’s what mentors are for. If your mentor’s assertion is true then don’t place the initial trade and when you reach the stop place the trade at the stop price, then according to your mentor you’ve got a 70% chance of the price going in your direction eventually. Of course you’ve got to look at the details such as what “eventually” means, assume that you don’t change the market in the initial trade and assume that “retrace” means a significant and realisable gain – but the same is true for your mentor’s assertions. So either your mentor’s assertion is meaningless because one of these details really matters or your mentors assertion is correct and you can make a lot of money or it’s wrong.

Another way to test this is to automate it – this is an Automated Trading Strategies group after all. So go code it. If it doesn’t work, tell us in a few days, if it does work then make a few million and then tell us that he was right. Or confront your mentor and say that if what he’s saying is right why hasn’t he made a pot of money out of it?

 

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Thanks for your comments. I know that for most consistently profitable traders, trade level stops are an inherent part of their overall strategy. Personally, I also use them for some of my strategies. I was just hoping to hear from those who employ some other alternative to trade level stops so I could bounce ideas off them because sometimes, a paradigm shift is necessary to keep milking profits out of this zero sum game. There are a few other significantly more profitable approaches to trade level stops that I’ve learnt from him (and he’s been making serious ROI since he began trading 3 years ago). So, anyone out there who does not use intraday trade level stops but something else? Thanks:)

 

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I recently began forward testing/optimising an EA I created on several majors to ascertain just how profitable it is to “cut your losses short and allow your profits to run”. Interesting results – I may adapt it and optimise it for spread trading on those brokers who pay spread rebates per trade…

 

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It seems the fad in EA design has certainly the stoplossless mean reverting sort. 70% might even be correct. The question is what do you do with the 30% that trend against you. Some might let them run against you hoping it comes back and not booking the loss.

When I look at historic trade results from these sort of EAs, they certainly support the human need to be right, but when you look at the open positions, they are almost always deeply drawn down, sseemingly waiting for that 3 or 4 sigma event to decimate the account.

It seems hardly the way to cultivate a trading career.

It could just very well be a difference in trading style and my lack of risk appetite control.

 

On another note, i recently came back from the Forex Money Show. There, two or three of the World Cup Trading champions were there talking about their trading styles.

As background, most of these guys were professionals coming from fund and bank trading desks who set out to begin trading for themselves.

Also,the World Cup is a serious competition. The one Larry Williams won. You have to put up 10,000 dollars minimum of your own money to trade live with just to compete.

They all had strong commonalities. The main commonality was the exact opposite of the no stoploss approach. They were all small loser, big winner devotees.

 

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nice idea for the strategy but not correct obviously. if you would wait for the stop level to be hit to enter the trade, ALL of your “normal” winners would never be entered into since the stop level is never reached (otherwise, it could never have been a winner).
So, you would end up with a system where all of your regular winners are erased and you have a 70 % chance of making “some” profits but 30 % of unlimited losses

 

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I clearly said that this is a new strategy which is independent of what led you up to the stop level. So yes, there would be no normal winners or losers, I’m not concerned about that. Don’t think of the original strategy as as setting a stop level, think of it as a level by which if you cross it then it’s a level by which it’s claimed 70% of all trades will eventually be above (assuming the original trade was long). That’s favourable odds and you can write a completely new strategy based on that.

Now it does depend on what you mean by eventually, if the OP really meant “at some time but then may reverse again” then we can look at that case, but that’s not my understanding of “eventually”. However, for this meaning of “eventually” the 70% is a meaningless number. If you toss a coin one million times then with an expectation of 99.9% of the time there will be some point at which you have more heads than tails (and vice versa). So the 70% is meaningless, you’ve just got to wait longer to improve your odds, and it doesn’t give you an edge so the whole assertion is meaningless.

So again we get back to either the assertion is meaningless or it’s right and the world has been too stupid to notice, or it’s wrong.

 

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Scale IN & Scale OUT?

Also, when the market is going to hit the stop, you might want to hedge by using next expiry futures so that you don’t book a loss (you freeze it) and you are still in the game and make up your mind.

 

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I really believe hedging is a very good approach. After all, the big biys are called “hedge” funds. Seeking an alternative to traditional trade level stops has been a major paradigm shift that has improved the overall quality of my trading. I like your idea of exploiting the connection between different markets (FX & Futures). But I prefer to exploit the connection between different currencies within the same spotFX markets. Can you recommend materials/approaches on spotFX Currency Correlation that you have especially benefitted from?
PS: It is better to stay out and decide what to do than hedging/freezing the trades while deciding what to do,except you have a superior exit strategy for unlocking the frozen positions.Thanks once more 🙂

 

 

NOTE I now post my TRADING ALERTS into my personal FACEBOOK ACCOUNT and TWITTER. Don't worry as I don't post stupid cat videos or what I eat!

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