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Scot -
You are absolutely right. You need to have an exit on any position. I
use Elliott to define said areas. It does not make a difference how you
come to your decision, as long as you have it. Then the question is: Do
you put that stop into the market, or do you monitor the market and keep
it in your head? I tend to put it in the market to avoid emotional
hang-ups and changing my mind thus causing a larger loss. SAY YOU ARE
LONG AT 1000 WITH STOPS AT 980 ON SECURITY-X. You might start thinking,
well, it is only going down to 975 so let me change the stop. Why not
exit, even go short then, and think about a long. SO NEVER CHANGE YOUR
STOPS FURTHER FROM YOUR ENTRY.
As for LTCM, they thought they had stops. Of course, they had a foolish
hedge, SHORT TREASURIES AGAINST EMERGING MARKETS DEBT. When that stuff
goes wrong, it goes wrong BIG. Soem people have said it was a trillion
dollar position, you can't have stops on that. I SAY: "BULLS--T!" At a
minimum, they could have closed the bond side, legging out of it, and
staved off some of the damage. But, the problem was, a lot of it was in
illiquid bonds, and options trades that the counter parties did not want
to take the other side of. They put themselves in a position that was
very difficult to extricate themselves from. So, IN ADDITION TO HAVING
STOPS, NEVER PUT ON A POSITION THAT YOU WILL NOT BE ABLE TO EXIT
GRACEFULLY FROM!
Scot Billington wrote:
>
> The recent failings of Long Term Capital illustrate the first and most
> important concept for a new trader, exit strategies and bail out points. I
> don't care about AMI, Elliott Wave, astrology, systems, fundamental
> analysis or Moses speaking from up on high, if you don't have a point at
> which you will exit every position, you will eventually go broke. You are
> not different or special. No exit, no money. This group had Salomon
> Brother's ex-bond chair, 2 Nobel Prize winners, and an ex-Federal Reserve
> vice chairman, yet they forgot the number one rule of trading, cut losses
> short. I don't care what you think, what your model says, or that the
> market can't go down because of XYZ, you must have a level at which you
> will not lose anymore money. There, literally, is no other way. Most
> things in trading can be done multiple ways. This is not one of them. If
> you are trading without a stop or exit level, stop before you lose all your
> money. You will. V. Niederhoffer (?), the other large fund to recently go
> belly up, was famous for trading without stops, too. (Isn't it odd that
> these two groups had one thing in common and they both lost all their
> money.) No stops may work for a decade, but the historically off the
> standard deviation charts move is coming at some point, and if you have no
> exit, you will go broke.
>
> If you disagree with these premises, I encourage you to respond with your
> points. The ensuing discussion may save you quite a bit of money because
> you are faulty in your reasoning.
>
> sb
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