Cornfed wrote: ↑May 23rd, 2022, 9:55 am
WilliamSmith wrote: ↑May 23rd, 2022, 9:39 am
always keeping a tight stop-loss placed to limit your downside on every trade.
Institutional investors had/have a procedure known as "running the stops" where they short into a rising stock, bring it down to below where it started and cover their shorts with other people's stop-losses before allowing the stock to rise again. The stop-loss tactic sounds like it would severely limit ways to profit.
That's a good contribution to the discussion, I think:
The market-makers who might do that ("running the stops," most likely via computer algorithms) will try to trigger the stops at round numbers or around well-known support and resistance levels, so traders trying to dodge that kind of thing might widen their stops beyond those areas. But obviously doing that means you have to be willing to accept the risk of taking a bigger loss as the tradeoff!
That might be the right thing to do depending on the individual case.
Take this with a grain of salt and do yourselves a favor and read his books, but I think Minervini said he committed to never taking more than an 8% loss on any trade.
I bet I'll do better after I re-read and re-annotate all those books to tighten up my own consciously applied set of rules, but lately I've been winging it with more short-term stuff like SQQQ during fun crash days (LOL) and am being so Scottish and parsimonious in setting tight stops on swing trades (those expected to be held for more than one day) that I may actually be giving away a bit of money this way, vs if I used wider stops.
But now on to the second thing here, an even more important part of the discussion, I think:
You said that using a tight stop-loss "would severely limit ways to profit..." So are you implying that there is some way to profit without protecting your downside?
If you don't put risk management as your top priority and make sure you never take large losses on even a single position, how are you going to protect your downside?
The value investors and hodlers with their "thesis" about what stocks or markets are going to do think they can diligently study fundamentals and use their brains to supposedly analyze macro conditions, and some become so confident that they think they don't need stop-loss orders.
But I've never seen them come remotely close to the returns that traders like Minervini or the other guys whose books I posted earlier in this thread can get consistently in bull and bear markets.
And it's not because the traders are geniuses or even smarter than the Wall Street hodlers like Cathie Wood, Ackman, or the Melvin Capital guy: The traders whose style I like continuously emphasize the importance of risk management, and they protect their downside and make sure they trade with the risk:reward ratio in their favor every time.
The thing the Wall Street fund managing "geniuses" I posted about above don't seem to grasp is that you don't make big profits by hodling individual or portfolios of stocks that are plummeting into double-digit loss making downtrends.
There's also a tremendous impulse sometimes to average down on a losing trade when you think something's going to go up, but you bought shares at a higher level. I've done this myself while learning to trade, but fortunately only with tiny little positions before I came to my senses and started using a rule-based system that includes a stop-loss placed as soon as I take any position in any stock or ETF.
There's also this temptation TONS of us have as beginning traders to say the equivalent of: "Well, I know: I'll buy stuff I think is going to go up soon/at some point, but I won't place a stop-loss, instead I'll just place a stop on profitable trades to lock in my profits, but hang on to the ones that go down until they go back up again and I'm in the green."
Well... what we end up having to ask ourselves later is: What if they
don't go back up again and put you back in the green? Ask a lot of guys hodling cryptos or pot "stonks", some of which crashed even in the middle of the big QE-inflated bull run.
On risk management: Paul Tudor Jones actually hung a printed wall sign in his office that said "Losers Average Losers" in order to remind himself not to average down (buy more of a losing position), and why Minervini and others whose books I recommend also tell you not to do that.
It can be a difficult decision when someone buys stuff they should not have, then is down a ludicrous amount on their position, like 50-80%. Should they sell it and feel bad, yet scrape back the remaining 20% of their $$$? Maybe, maybe not.
But that NEVER has to happen:
Just accept the smaller losses from using disciplined rule-based management and placing a stop-loss order at an acceptable place every time, and you literally never will incur the big double-digit losses!
As for where to place the stop-loss: It depends on specific price action in the stock/ETF in question, but you can still have your own rule about a maximum allowable loss and therefore pass on trades that would require an over-wide stop. For example, if your max loss you were willing to incur was 8%, but the optimal stop-loss based on the chart would call for a wider stop and you'd need to risk 9-10+%, just don't do that trade!