Stops are for wimps

[spikefader]

Hi Spike, you are right: the contents of my post are much more nuanced than the title, which was meant as an attention getter. It is only true with an addition like: When you follow $$$Mr.Market$$$'s system.

I have no experience with stops. The successful strategies with stops that I had in mind, were your strategy (it is successful, isn't it?), CANSLIM (with its following it better be successful), and the turtle traders http://www.originalturtles.org/

I think your last paragraph is perhaps a bit mixed up. For $$$Mr.Market$$$'s system stops damage your returns. Period. When you use stops as protection against the occasional lemon, you run a much greater risk of a streak of smaller losses that throw you out of the game. That makes investing look too much like gambling in my eyes. Of course you may have another strategy in mind here, and your "It's the winners you should let run", makes that probable.

There is only one way to invest your money in a responsible way with $$$Mr.Market$$$'s system, and that is by diversifying. If you can't do that, don't think about it. And I don't think you need $100,000 as Websman supposes. (But it is always nice to have so much money to play with.) Start with 8 positions, allow 1% slippage for commissions, pay $10 commission per transaction, and you need only $16,000. Allow 2% slippage on a round trip and you need only $8000. But that's about it. With lower commissions you need proportionally less, with higher, more.

I am not opposed to stops on principle. Not even in combination with $$$Mr.Market$$$'s system. But fixed stops just don't seem to work. Perhaps sliding or trailing stops will work, who knows. Just show me the numbers. Until then: what's good enough for $$$Mr.Market$$$, is good enough for me.

Regards,

Karel

Hi Karel

Thanks for that. Another good post.

Not sure I could ever understand how using protective stops could make investing more like gambling, but I respect your opinion anyway. Maybe the source of confusion is the way you look at entries as 'investing' and I look at entries as merely 'trades'. I guess this will always be the fundamental difference between purely FA-based trades and purely TA-based trades.

Good work drilling down on the responsible way of trading Mr.Market's system. That topic should be an entire thread of its own imho! Because I fear there are some who take only a few of Mr.Market's trades and do not properly diversify, which leaves them overexposed and in a precarious position - whether it be gamble money for them or their serious investing money. It is a very alluring thing to see "62 winners in a row" boasted, and it could easily lure naive people to feel a false sense of security about the chances of succeeding with an undiversified portfolio. I say all this not to criticize anyone, but to caution the unlearned and inexperienced readers. This caution applies to every system that people might see shared on the Net. No matter what system one follows, whether FA or TA based, risk must be DEFINED and LIMITED, whether by using stops or proper portfolio diversification.

Actually, I'd really like to know how many people there actually are that follow Mr.Market's system and ARE undiversified and not using stops. Maybe a poll would reveal the number. And if the interest exists, perhaps I'll put some thought into developing an offshoot system that takes Mr. Market's calls, but only the most extreme low-risk entries, such as intraday S2s. Once a position is open, use tighter target rules like R2 targets, and sensible low-risk stops, and then only look to catch a swing trade for whatever percentage the market gives, as opposed to holding for a flat 15%. These trades would be more support/resistance based swing trades.

How big would the percentage win be? I was surprised to see that MCRI today shows an impressive 14.8% profit possibility. S2 is 34.84 and R2 is 40.00. Admittedly, it seems like it would be pretty uncommon for a stock to fall to S2 then bounce to R2 in a single day, but it is at least possible!. A more likely event would be price falls to S2, then meanders over the next couple days to an R2, which by then may have dropped several points due to the intraday price action, which of course modifies the fib numbers.

Just thinking about it, it's aroused my curiosity and I think I'll do it anyway. Here's what I'll do. I'll take the latest Mr. Market pick, and take automatic intraday S2 entries when and where they appear, and take profit at the very next intraday R2 (probably a couple/several days). I'll repeat this process of swing trading that pick, until Mr.Market's next pick, or his target is reached. For protection, I'll use stops, and I'll look to drill down on the specifics of that after more thought. I'm thinking maybe something mathematically definable like STOP=(S1-S2)x2, which will make it consistent, easy to calculate and leave discretion and emotion completely out of it.

If nothing else, it will be fun to watch how Mr.Market's picks behave relative to intraday Fib supports. Maybe we'll all learn something useful from that....

I'll post the charts, entries/exits in my thread for anyone that's interested in following it.

[scifos]

I don't hold 14 stocks at once, usually 5-7, which I know is not diversified. Personally, I don't really worry about diversification. I don't strictly follow MrMarket picks, I pass on some and buy some, I buy other stocks too. I would say my strategy is similar, but not the same as MrMarket's.

I used to not use stops, mainly because I was new to the game. Now I have trailing stops on all my positions and I try to tailor each stop to the stock (ie its volitility, price range, etc) but have gotten stopped out of some good ones (URBN the day before it announced great earnings). I will admit that I am still very weak on picking good entry points and stops, but I take a similar approach to that as MrMarket in that if I pick a good stock then the entry price is not absolutely crucial (although it can be very helpful to nail the right entry).

[Websman]

There is only one way to invest your money in a responsible way with $$$Mr.Market$$$'s system, and that is by diversifying. If you can't do that, don't think about it. And I don't think you need $100,000 as Websman supposes. (But it is always nice to have so much money to play with.) Start with 8 positions, allow 1% slippage for commissions, pay $10 commission per transaction, and you need only $16,000. Allow 2% slippage on a round trip and you need only $8000. But that's about it. With lower commissions you need proportionally less, with higher, more.

Regards,

Karel

Ok, so I supposed wrong...lol

[Karel]

Not sure I could ever understand how using protective stops could make investing more like gambling, but I respect your opinion anyway. Maybe the source of confusion is the way you look at entries as 'investing' and I look at entries as merely 'trades'. I guess this will always be the fundamental difference between purely FA-based trades and purely TA-based trades.

Yes, that may be part of it. And indeed, stops have "protection" written all over them. You could see them as an insurance premium against an insufferable loss.

Now we have seen that the premium is more than the loss it saves you from if you are properly diversified, when you follow $$$Mr.Market$$$'s system strictly. My gambling analogy becomes valid when people don't have the capital to be properly diversified. That also means that they will run into the wall really fast; they don't have much elbow room. If a person invests in one stock and has lost 1/3rd in 10 trades, and didn't have a lot to begin with, I consider that as burned. Out of the game. This doesn't work. I did 20,000 runs where I picked 10 random stocks out of Ernie's 76, and 13.7% of those runs dropped below 66%. What about the 20% stop? 15.2% of the runs dropped below 66%. OK, let's call it a tie. But it isn't protection either. Yes, the losses are limited, so the 13.7% show greater losses on average than the 15%. But you run a 1 in 7 chance of failure either way. I call that gambling.

I almost didn't look at the 8% stop, as the average gain is hardly enough to make up for slippage in small positions: 2%. But here you are right: only 2.7% of the runs drop below the "unacceptable" level. But the average gain per round trip excluding commissions is 2%, so practically speaking you pay the price for protection against the unmentionable by standing still when you are lucky.

If you don't want to gamble, get enough money to be able to diversify properly. If you want to follow $$$Mr.Market$$$'s system, that is.

Regards,

Karel

P.S. By all means start a new thread for your analysis of the picks, if you like that better! I would prefer that, as things might get mixed up too much in one thread. And yes, I would be very much interested.

[Karel]

P.P.S: I did a recalculation where the "investor/trader" gave up as soon as the loss became more than 33%. The percentages of the runs where the loss became "intolerable" then became:

$MM$ - 18.8%
-20% - 24%
 -8% - 10%

The conclusion remains the same

[dmk112]

If you don't use stops you're gambling with your money. No more to it.

[Websman]

If you don't use stops you're gambling with your money. No more to it.

I love gambling! It gives me a rush.

[dmk112]

I love gambling! It gives me a rush.

Yea me too but only if im winning

[mrmarket]

If you don't use stops you're gambling with your money. No more to it.

If you get stopped out, what do you do with the money from the stock you just sold? What makes you so sure you will outperform your old stock, that you would have held onto, with your new investment?

A lot of times a stock gets "stopped out" because of an over all market down draft. If that is the case, I see no reason to use stops. If you just want to sit around with your cash, why not just invest in a money market account and sleep at night.

To me, you hold a stock because you like it. You sell it when you don't like it anymore.

[Karel]

If you don't use stops you're gambling with your money. No more to it.

The disproof of a universal statement is easy: just give one example where the statement doesn't hold, and you are done. I already did give such an example, so I am already done disproving your statement.

But perhaps it is a good idea to explain a bit more what I wanted to say. I didn't want to say: stops are bad; no more to it. I have shown pretty conclusively (as far as possible with a limited number of picks - 76), that a fixed percentage stop in conjunction with $$$Mr.Market$$$'s method lowers your returns, and when you add a specified risk tolerance and no diversification, it not only doesn't remove the gamble from the game, but it even lowers your odds. $$$Mr.Market$$$'s method needs diversification to get the gamble out of the game, not (fixed percentage) stops. But change any one of these parameters (different kind of stop, alterations to the method (or a completely different method), higher risk tolerance, and more diversification), and stops may start making sense. But only when you change the first two (different kind of stop, or the method itself), you might get a case where stops don't hurt your returns.

But please, if you love your money, make an analysis first, or paper trade your strategy if an analysis is impossible or impractical, before you put your money into it.

If you rely on blanket statements, you're gambling with your money. No more to it.

[dmk112]

If you get stopped out, what do you do with the money from the stock you just sold? What makes you so sure you will outperform your old stock, that you would have held onto, with your new investment?

A lot of times a stock gets "stopped out" because of an over all market down draft. If that is the case, I see no reason to use stops. If you just want to sit around with your cash, why not just invest in a money market account and sleep at night.

To me, you hold a stock because you like it. You sell it when you don't like it anymore.

There are 100's of stocks everyday breakingout and going for new highs... not all stocks you pick are winners...thats what the stop is for. You get stopped out go on to the next stock.

[mrmarket]

There are 100's of stocks everyday breakingout and going for new highs... not all stocks you pick are winners...thats what the stop is for. You get stopped out go on to the next stock.

Just because a stock has traded down does not mean it will not recover. I have dozens of stock in my winning streak that were way down, and would have been stopped out, but actually then outperformed the market and eventually hit my sell target.

You're right..as of today, only 64 of my last 76 picks were winners.

[dmk112]

64 out of 75...not bad :P

[spikefader]

The disproof of a universal statement is easy: just give one example where the statement doesn't hold, and you are done. I already did give such an example, so I am already done disproving your statement.

But perhaps it is a good idea to explain a bit more what I wanted to say. I didn't want to say: stops are bad; no more to it. I have shown pretty conclusively (as far as possible with a limited number of picks - 76), that a fixed percentage stop in conjunction with $$$Mr.Market$$$'s method lowers your returns, and when you add a specified risk tolerance and no diversification, it not only doesn't remove the gamble from the game, but it even lowers your odds. $$$Mr.Market$$$'s method needs diversification to get the gamble out of the game, not (fixed percentage) stops. But change any one of these parameters (different kind of stop, alterations to the method (or a completely different method), higher risk tolerance, and more diversification), and stops may start making sense. But only when you change the first two (different kind of stop, or the method itself), you might get a case where stops don't hurt your returns.

But please, if you love your money, make an analysis first, or paper trade your strategy if an analysis is impossible or impractical, before you put your money into it.

If you rely on blanket statements, you're gambling with your money. No more to it.

Nice post. Yep, I agree, that blanket statement, as with most blanket statements turn out to be inaccurate.

In the context of this thread, there are exceptions to the generally accepted 'day-trading' principal that 'stops save lives'. In the case of Mr.Market's diversified system, stops clearly DO NOT work (thanks Karel for the calculations).

So he is not gambling with his money, but rather putting the odds on his side. Hard to deny his 62 straight winners and the apparent robustness of his model. I wonder if it would survive the test of a long and yucky bear run.....

[phobophobia]

If Mr. Market makes more money when he doesn't use stops, then he shouldn't use them. If you don't use common sense, you're gambling with your money.