The Power of Hard Stops

18 may 2019

There is general perception among the traders that if you place a stop loss order, it 'll be taken out sooner than later.
Even I published similar idea in one of my posts (I ll tag below later).

So "Stops get taken" is the general concept. Is it valid or not? Let us check with a simple logic and a few assumptions.

I am using a simple assumption that stops get taken but not always. Let us take generally accepted 50% rule.
It means if you place a hard stop in the market in 100 trades, it will be taken away in 50 trades.

My second assumption is that the trader knows his edge in the market. Which means he knows when to take a high probability trade AND knows money management (takes number of shares as per his risk on capital) and risk management (dun take more than 2% risk on his capital in a single trade).

The third assumption is that the trader takes 1:2 risk to reward ratio in each and every trade he takes.

So, with all these assumptions a trader enters in a market and takes 100 traders (may be in a month or more whenever his edge calls for a trade).

As per our 50% assumption he loses in 50 trades, i.e, 50*1=50 pts. For the remaining 50 trades he made 50*2=100 pts.
So Net he made 100-50=50 points.

So according to this hypothesis a trader would never be in a losing position even if he places hard stops in the market.

I think those traders who use hard stops for EOD position lose more frequently than those who go for 1:2 target, coz the target in the latter is highly likely to be achieved. Opening a position in the morning and holding it till EOD can make a jackpot on some days while take big stops on most days especially when market is not trending.

Well it all depends upon the trader's style.

For me personally, the 1:2 profits are good for those who want to trade for a living. Stops are my insurance in a trade, or THE ONLY THING IN TRADING THAT IS IN MY CONTROL.

I hope it makes sense to most traders and might change the perception about stops for some of them.

Trade Safe, Stay Healthy
Keep liking
Regards

19 may 2019

Nota

31 may 2019

Nota

Perhaps today was the day when using hard stops would have prevented the unbearable losses to many bank nifty traders, as it lost more than 1000 points in a matter of minutes. Although it pulled up flat but it could not regain morning levels.
Whether it was a fund selling or high frequency trading, would always remain under question. But the truth is that, it wiped out many trading accounts. People who used to trade bn without stop to avoid whiplashes got punished today, esp. those who trade heavy. Reason being when u have such huge loss in ur PnL, at one point u have to give up or ur broker will make u do it.

Guys I ll say it once again, EITHER START USING STOP LOSS OR STOP TRADING. You can never be a successful trader if u dun have protection.
All the best.