Sunday, April 03, 2005

Stops

Did I ever mention it?
I hate Stops!
I learned to live with them, a necessity to be paid, if I want to survive in this business.
But I don't like them, I'm not unemotional about a Stop.
 
I can observe this state I'm in and I can now place my next trade relatively calm and not influenced by the previous Stop. But that's not really true. The Stop is still there in my mind, it lurks and it still questions the next trade decision.
 
A Breakeven +1 Tick trade in comparison, is a lot better. Sure, if I let a 10 tick winner come back to BE +1, I get Stopped out and then it takes off, I ask myself. Hey you idiot, trading is a risky business and if you try to take all risk out, you won't make it. But if it goes against me 10 ticks, comes back, takes me out at BE+1 and then drops like a stone, ...I can tell you, I feel glad and a bit of a pity for the trader, who took me out at BE + 1.
 
As you can see, for me, Stops are not unemotional, are not just the cost of doing business. I tried it, I really tried it, but looking back the nearly 3 years I have a detailed trading journal, I always find these huge drops and then the slow and painful build-up in my account.
 
Did I mention it? Right before I started hearing about the defense, I had this Black Monday. More than 700$ down ( 8% of my account) on 3 trades. And unnecessary in hindsight. Not something like last Friday, just a
Let's run the Stops call of some of the bigger traders
Me, being a small guy, being a good follower of the, I trade only with a Stop maxime, got crushed.
And here comes Anti telling me, hey Chris what do you do there lying on the floor.
Oh me, yeah I'm a bit beaten up, got the S**t in the face and so. You know the routine. But it's just a week and I will be back from where I started. Usually it was then 2 weeks, because after such an experience the next day wasn't anything better, but worse.
Then Anti continues, hey, you know, I only use disaster Stops, so I know I will live the other day, but for the day to day business I do use the Defense Strategy.
Me, I dumbfounded ask him, what's that, Defense Strategy, never heard about it. And he explains it to me.
 
It is like someone switched on a sun in a dark room. Finally someone telling me, yeah Chris there is a way to avoid Stops, but at a price: You will avoid a lot of Stops using the Defense, you might be able to trade each and every one of your contracts to profitability, but if it goes against you, it will cost you really BIG time. If this happens after you applied the Defense for a while, that's ok, because you will have made enough to pay for this BIG hit, if it happens, when you apply the defense for the first time, ...well, that's bad luck.
 
Me, I say, getting hit BIG time now and then, I'm used to. That's what happens with my regular Stops as well. Actually my MoneyManagement calculation sheet, which tells me, if I have a chance to make it with my current numbers or not, has this BIG hit already build in, as it's such a common occurence in my trading carreer.
 
Only knowing about a way to avoid the regular Stop helped me to make these 700$ back over the next two days, not two weeks as it was just 6 months ago.
 
My Loss% rate is down from 20% to 11% in March, only because I give my trades more room, because I use the Defense as it fits me and my trading style. Actually I applied the Defense 3 times in the last 2 weeks, with all the other trades it wasn't necessary, as the Euro never went the 20 ticks against me to hit the defense.
 
Sure, I could have used Stops instead, but these would have been hit more often and after a Stop, I usually do not reenter in the same direction within the next 5 minutes. I just don't do it. 20 ticks, that's 250$/contract and that's a lot. OK, I could use 3 or 4 ticks Stops, I tried it, but I fared worse, it cost me even more at the end of the day.
So I was already back to bigger Stops, before I was introduced to the Defense.
 
Do I use the Defense in each and every situation? No!
 
First, you need to know the contract you want to use it in and out. You need to know it's quirks and the little games they play with it.
I use the Defense on the Euro and the Russel, I might use it on CAD and AUD as well. But it sure will take a long time, before I use it on the HSI. On HSI I trade with plain regular Stops, I might even switch to Stop Reverse orders in the future.
 
Second, you need to decide, how you trade the Defense. What do you want? A big gain, each and every contract at least a 10 tick winner, or are you content with a Breakeven +1 on the whole trade. Me, I have my winning trades, 55% at the moment, and 34% Breakeven +1, and I have decided, that until I know a lot more about the Defense, I'm content with the Breakeven +1 result on a defense trade. If I get more, sure, I won't complain, but it's not my goal. I want a BE + 1 on the Defense for the whole trade.
 
Do I propose, that you should use the Defense instead of the regular Stops? Sure no.
 
If you have no problems taking a Stop, if you are green at the end of the day, even if you took some Stops during the day, change nothing, don't think about the defense. You have my full and absolute admiration. You are one of the majority of traders for whom the old sage advise is true: Never add to a losing position.
 
Also, if you a struggling novice trader. Hands away from the Defense. It's just too dangerous. You can really hurt yourself using it in the wrong way.
 
So for whom is the Defense. Simple. For nobody else, but me. I have incorporated it now in my trading plan.
If you decide to use it as well, you need to find your own way how to do it. Same, what you have to do with every other tiny trading idea you find somewhere.
 
I wish you a relaxed trading week,
 
Chris

2 comments:

Racer's Edge said...

Croc...I just wanted to follow up on and clear up something I said earlier in Teddy's with regard to using the Defense Strategy. When Antiic was in the midst of his troubles I said something to the effect that this reminded me of "Sport's post on the Kelly Ratio." I didn't intend to imply that by using the Kelly ratio to size his trade that Antiic could have avoided his predicament. I don't think much of the Kelly ratio. I believe it to be the opposite side of the coin from the Defense Strategy: one accumulates contracts when in a hole, while the other accumulates contracts when putting on a new position.

I advocate a middle approach: why not put on your position and after it has successfully moved in your direction so your Stop is not a Stop Loss but a Stop at BE +1, add contracts then? The advantage is you know the trade is going in your favor and you can concentrate on maximizing your profit (less stressful) than on trying to save your position. Again, I mean no offense to either one of you guys but can tell you from experience that the hole on Friday would've taken about 24 to 30 contracts to escape...I've been there and done that in papertrading sessions dozens of times and it is the same story over and over again.

Ultimately, the use of a 'martingale' which is what your strategy is called in gambling is a losing strategy; primarily, because the individual employing it doesn't have the margin to continue to play. I know I couldn't afford to margin up 20 to 30 contracts every time I wanted to escape these drawdowns I found myself in because of poorly timed entries. So, I decided to take the pain of a Stop Loss and concentrate on maximizing my profits when I was right. Best regards to you.

Phil Trader said...

You might try using a Monte Carlo simulation for your Defense Strategy in combination with your current "blow up" cycle. The results may convince you to take another approach.