|
PureBytes Links
Trading Reference Links
|
Since there has been much discussion of this subject lately, I thought I would
pass along a discussion Larry Williams and I had at one of his seminars in the
'80's regarding stop losses. Larry said that he had done extensive study into
the subject as to where to put stops and had come to the conclusion that it
didn't make any difference where you put your stops from a profit/loss
standpoint excluding commissions. In other words, the market behaved in a
completely random manner over the short term with regard to the current price
giving a risk/reward ratio of 1.0. My own research over more than 40 years has
not been able to refute his conclusion. If for the moment you accept his
research, the logical place to put stops then should be based on a trader's
comfort zone and should be consistent for like trades. That is, you ask
yourself. "How much am I willing to risk on trading the DMark (for example)
and you consistently place your stops accordingly.
For a number of years, I programmed trading systems and have seen well over
350 systems. Many sold for thousands of dollars. Some were just curve-fitting
markets for a relatively short period of time (several years) based on trading
stops. You can put together a profitable commodity system by looking at where
to place stops for that time period. A good example of this is the DMark
system that was in the April issue of TAS&C. The analysis of the article was
to use a 0.70 stop on both long and short positions. You would have had two
trades since the issue came out--both with over $1,000.00 losses. If you look
at the period used to determine the recent stop value of 0.70 you will see
two occasions where a 0.70 stop just missed taking you out of positions which
subsequently proved profitable. If you have been trading the next-out contract
you would have been whipped out of both (June, 1990 (B) & Nov., 1996(S)) for
large double-losses on each.
My own opinion is that there are support/resistance levels in the market
where, if the price is reached, it will trigger a number of orders that will
move the price rapidly through this area. These are where others, using their
own TA systems, have determined that stops should be placed. I have seen a few
systems (usually for commodities) that try to identify where these points are
and place buy/sell orders to capitalize on this volatility.
This note has already gotten longer than I had intended, but hopefully it will
be "food for thought" for some of you in that if you are looking for the Holy
Grail through placing your stop orders, IMO you won't find it and would be
better served spending time on other areas of your system.
Good trading,
Joe Nemecek
|