nac Calling JOBBERS/SCALPERS

[tnsn2345]

Dear Friends,

Following are the assumptions before I get into this topic:

1. Traders trade basis TA (charts, indicators, volume etc) and not FA. Hence Jobbers will be exclued here as they generally do not use either TA or FA
2. A Trading Plan is in place before entering into a trade. A typical Trading Plan will include:
- Awareness of market condition
- Entry reason, instrument, time, price
- EXIT TIME (holding period of the position, if the position is in favour)
- Review period interval of the position (viz charts, indicators whatever your method uses)
- Adjustment plan (adds, reduction, status quo)
- Estimation of Maximum drawdown at the end of first review period (this can be done basis the volatility). Your quantity, exposure etc will depend on this
- Stop Loss : For 'traders' who religiously follow this practice and arrive at the SL amount on whatever calculation they do

3. Trader here is not a novice and has had fair experience of trading including undergoing trauma of living through losses for extended period of time
4. Trader here has a reasonable strike rates derived from his method(s) i.e. range between 40% to 70%

The Precursor:

Most of us have learnt to ride a bicycle in our childhood. We have fallen, got hurt, scared, demotivated to quit, but the fun of riding the bicycle always made us to take a jig at it again and again, till we perfected it.
In the process we have had bruises, scars and even fractures. This is almost similar to trading without Stop Loss as there is not protection for you when you lose balance and you crash getting hurt. (Ever wondered that you could prefect riding a bicycle despite without a SL, but have taken so many years to perfect Trading even putting SL???)

Suddenly, some smart man suggested that we should have ‘Stop Loss’ on bicycles so kids don’t injure themselves while learning. So he put a pair of small wheels along the rear wheel, so the bicycle was actually a four wheeler than two. These two super supporting small wheels kept the ‘kids’ (I guess most of us have not learnt riding on such ‘four’ wheelers, anyways) from falling on either side, hence protecting them from injuries. A good idea indeed !!

But as the kids grow up and they learn ‘balancing’ on their own they would get rid of the first small wheel and a few days later the second small wheel. Now they are riding a bicycle (two wheeler !!) in the real sense. We have all seen this right, so there is no excitement till now. But I would like to ask here, why do you remove the small side wheels after you have learnt balancing???? You can very well keep them as it is, why remove it???

Yes, why we remove it? Why we remove this ‘Stop Loss’ forever and never use it…..


Regards,

 

[sanjay1876]

Yes, why we remove it? Why we remove this ‘Stop Loss’ forever and never use it…..

Please continue with your argument. After you have completed i'll put forward my contrarian view to this purport. Also can you give some other example to explain your idea because this analogy has many loopholes straightaway.

 

[ranger123]

Yes, why we remove it? Why we remove this Stop Loss forever and never use it..

Sir, we remove wheel because we have now learn the driving very well and now we do not have fear of falling down because of loosing balance.

But sir, driving cycle is different than trading I think so. But please continue your interesting story please.

Thank you and best luck

 

[nac]

Please continue with your argument.

Please don't take it as an argument. He has his own views and you have yours and I have mine. He has taught us a lot, take it as one his chapter. "Opinion differs buddy"

Sir, we remove wheel because we have now learn the driving very well and now we do not have fear of falling down because of loosing balance.

But sir, driving cycle is different than trading I think so. But please continue your interesting story please.

:lol:

"Remove stop loss after you learned to trade" that's his saying.

 

[sanjay1876]

Please don't take it as an argument. He has his own views and you have yours and I have mine. He has taught us a lot, take it as one his chapter. "Opinion differs buddy

I did not mean argument as in fighting, i meant argument as in brainstorming session.

 

[tnsn2345]

Fair assumption would that the wheels are removed because the kids have learnt riding the bicycle. This does not mean that the kid will not fall now, he can still fall but now the fall would be mostly triggered not due to his own misadventure but by some external factors viz, some one banging him from rear, tyre burst while riding, a stray dog suddenly running across the road, unnoticed potholes etc etc

But still we have decided to remove the wheels not because the kid will now NEVER FALL but he when is likely to fall he will use his own FOOT to prevent the fall. He will not rely on EXTERNAL small wheels (Stop Loss) which used to protect him till now while he was still learning.

The small wheels are physical Stop Loss, while the feet is the mental Stop Loss. Using his feet to halt the bicycle at his destination or in between to prevent himself from falling comes NATURALLY to the kid. There is NO THINKING involved when to put the FOOT DOWN. It comes naturally!!!. On the contrary if there were the small wheels on the bicycle forever, they would always act as artificial external way to hinder the driving process and would always prevent him from taking those sharp turns, do the wheelie, race the empty road, race through the slopes freely or struggle hard upway. The small wheels just cause obstruction than help him now since he has now perfected doing the balancing act !!!

Market conditions are not same all the time (I am not covering this here), so you will sometimes have to face sharp turns, do the wheelie, travel downhill or struggle uphill. Again you will never know what could happen next as the conditions may or may not change suddenly.

It is traders mentality to keep trading in various kinds of market conditions and all the time. Of these traders there are some smart traders who have different methods to trade different market conditions. And unfortunately for most of these smart traders the methods get overlapped or interchanged. And then so does their SL. But while I am saying this, the SL they put is most likely arrived in a RANDOM fashion or on the basis of % risk per trade (..haha..). How on the earth would the Markets know YOUR risk per trade % and move in your favour keeping it in mind that YOUR SL should not be hit (I wonder..) As it is random pricing of SL and further even illogical (read sentimental) concept of trailing SL, it is often called that SL management is art than science (you may read abstract art. Abstract art : No one understands it, but do not want others to know about it hence you start appreciating it. The next guy also does the same. So no one argues.)

The very fact that you have put the SL in the first place makes you feel that you are IMMUNE to everything happening in the market. You start feeling that nothing can happen to you now as worst is that you will exit at the SL. You act God. This feeling deprives you of the opportunity to exit your WRONG trades much earlier as you always have the feeling that you have the SL in place and this SL will HELP you make profit and the SL will never be hit. Invariably the SL is hit. And hit. And hit. Then you increase the SL gap as you feel that the earlier SLs were too close (having seen market reverse after hitting your SLs).

Using SL for trading, you take 1 step down, x steps up, 2 down, x up, 2 down, 1 down, x up, 2 down, x upand so on. At the end of the month either you are down or at par or at best marginally up. But is it worth all the effort, time and opportunity one had all during the month.

On similar lines, what is the use of a helmet when you ride a motorcycle? Why is the safety net in the circus? ..and their analogy in tradingwill write more tomorrow..


Regards,

 

[anuragmunjal]

The very fact that you have put the SL in the first place makes you feel that you are IMMUNE to everything happening in the market. You start feeling that nothing can happen to you now as worst is that you will exit at the SL. You act God. This feeling deprives you of the ‘opportunity’ to exit your WRONG trades much earlier as you always have the feeling that you have the SL in place and this SL will HELP you make profit and the SL will never be hit. Invariably the SL is hit. And hit. And hit. Then you increase the SL gap as you feel that the earlier SLs were too close (having seen market reverse after hitting your SLs

hi..
Interesting analysis. but the way I think is that if I put on a trade with a predetermined SL and later on find that the market does not behave in the manner that I expected it to and squrare off my position before my SL is hit. what am I doing..... I am still booking my loss . hence I am still executing my SL albeit I have raised my SL closer to my entry price. hence the debate now is not whether having a SL is good or bad, the debate here is whether the SL should be fixed at a preconcived point or should it be raised or lowered according to the way the market reacts (or the way I percieve the market) after putting on my trade.


It is trader’s mentality to keep trading in various kinds of market conditions and all the time. Of these traders there are some smart traders who have different methods to trade different market conditions. And unfortunately for most of these ‘smart’ traders the methods get overlapped or interchanged. And then so does their SL. But while I am saying this, the SL they put is most likely arrived in a RANDOM fashion or on the basis of % risk per trade (..ha…ha..). How on the earth would the Markets know YOUR risk per trade % and move in your favour keeping it in mind that YOUR SL should not be hit (I wonder..) As it is random pricing of SL and further even illogical (read sentimental) concept of trailing SL, it is often called that ‘SL management is art than science’ (you may read ‘abstract art’. Abstract art : No one understands it, but do not want others to know about it hence you start appreciating it. The next guy also does the same. So no one argues


there are a lot of guys around who feel that all price movement is random.I also subscribe to the same school of thought.I beleive that all price movement is random with a few trends thrown in, as would be the case if we try to chart the outcome of a simple coin toss. the general outcome would be random with a series of successive heads or tails thrown in between.this series of successive heads or tails is what I consider as 'trends'. I totally agree here that the market would not respect any random SL, but beleive me it would not even respect any 'pivot low or high' or any 'fibonacci levels' if it doesnt want to. hence I do not beleive that there is any harm in putting a random SL initially and then moving it later on according to the way the mkt moves .
just my thoughts. the intention is not to counter u but initiate a healthy debate.

regards

Anurag

 

[sanjay1876]

@tnsn2345

You are making assumption that everyone simply waits for stoploss to be hit. As in my previous post I have clarified and as Anurag has also mentioned that choice of exiting the trade before stoploss is hit is always open and often exercised. Also stoploss is used to prevent runaway losses especially during sharp move in opposite direction of trade.
Now coming to your analogy of bicycle. Everyone has his own prespective and sees the world accordingly. In my view the smaller wheels are like extra caution, e.g. like someone uses 1 indicator to trade with 40% chance also when he has 2 indicators giving same signal his chances get to say 55%. So he trades only when both indicators give same signal. So he obviously misses some oppurtunity as well. So in my view inherent precautions in ones system are the two smaller wheels.
Now what is stoploss then?
Stoploss is the brakes. It is used to prevent falling in pothole. Now whether you drive 2 or 4 wheeler brakes are paramount. Also its importance increases with increase in stakes. Like one can drive bicycle withot brakes but what about driving a car without brakes!

 

[iamaaditya]

Fair assumption would that the wheels are removed because the kids have learnt riding the bicycle. This does not mean that the kid will not fall now, he can still fall but now the fall would be mostly triggered not due to his own misadventure but by some external factors viz, some one banging him from rear, tyre burst while riding, a stray dog suddenly running across the road, unnoticed potholes etc etc


On similar lines, what is the use of a helmet when you ride a motorcycle? Why is the safety net in the circus? ..and their analogy in tradingwill write more tomorrow..

Regards,

Everytime you said, I was fore-running your thoughts and this time bang on you wrote something which i would have.

I always (of course not always, after initial hiccups in trading) had a view that One should have Discipline enough to Cut the losers on Will and not depend on Stop-Loss (which in a way kind of forces you, though some novice traders horribly move their stop down which is another crime completely).
but all said, no one can expect a novice Trader to mature soon enough (without hitting some stones) to a discipline where he can put the legs down automatically without any hesitation, so everyone has to go with the phase where you use "Extra wheels".

Also we should never discount the possibility of "Black Swan" occurring (for the completely uninitiated, its events with very low probability but very high impact say October 19, 1987 when Dow crashed 22%) and for such scenario's there must be a stop loss , which according to me should be at level where it doesn't come into play on normal days.

Extending the analogy, i would like to call these kind of black swan stops as "helmets" and not "extra wheels" (this is first time when i am deliberately trying to fore-run your thoughts, i hope i am getting it right ?), though a bike rider doesn't expect to hit an accident everyday and by probability chances of it occurring (even in is complete lifetime) is very low so he would rather not use one and rather enjoy free ride but then one accident without helmet could kill him ending any further progress (analogical to getting bankrupt). So the question is, Is it worth to wear helmet everyday where expectancy of life killing accident is very small, i firmly say yes.

If you guys are aware, the author of "black swan" Nassim Nicholas Taleb , used to be a trader and fund manager. In fact he opened a Fund (Empirica), just to capitalize on such black swan events. Every day he used to buy Very Very far Out of the money options (but sadly couldn't make much money and eventually Fund was sold out and he returned to writing books)

P.S: to nac, don't think we are fighting, in fact we are all learning and different view points makes it even better.

 

[tnsn2345]

BUT this doesn't mean that there will be NO STOP LOSS. STOP LOSS must there to save you from catastrophe. Let's say your internet connection is gone or no electricity, system crashes, thunder, and worst (one case i know) Heart Attack (or other medical emergency)

hi..
Interesting analysis. but the way I think is that if I put on a trade with a predetermined SL and later on find that the market does not behave in the manner that I expected it to and squrare off my position before my SL is hit. what am I doing..... I am still booking my loss . hence I am still executing my SL albeit I have raised my SL closer to my entry price. hence the debate now is not whether having a SL is good or bad, the debate here is whether the SL should be fixed at a preconcived point or should it be raised or lowered according to the way the market reacts (or the way I percieve the market) after putting on my trade.

@tnsn2345

You are making assumption that everyone simply waits for stoploss to be hit. As in my previous post I have clarified and as Anurag has also mentioned that choice of exiting the trade before stoploss is hit is always open and often exercised. Also stoploss is used to prevent runaway losses especially during sharp move in opposite direction of trade.

Dear Aaditya, Anurag, Sanjay,

Your definitions of SL is right but different.

While Aaditya you are putting SL to address a catastrophe, Anurag is defining moving his unrealised expected loss (defined by his initial random SL) closer to lesser loss in the event of identifying a wrong trade. Sanjay is a fence sitter with one leg on Aaditya's definition and other on Anurag's.

While Aaditya definition is similar to wearing helmet riding a motorcycle (or the safety net in a circus) where the idea is not to get down from the bike head-down first. The helmet is just to protect us from any UNFORSEEN circumstances which are out of our control (aptly defined by Aaditya in his post w.r.t. trading). It is still the feet which we use to get down from the bike when we reach our destination or are interupted before reaching it. This definition can be termed as CSL - catastrophe stop loss and not SL which is widely used in trading.

Anurag, with your definition, which most of the traders would do there is an element (howsoever small) of unconviction when you enter a trade. No one likes to see his position going down immediately one enters the trade. But is happens many (or most) of the time, especially to traders who put the SL (as per your definition) as the decision to trade is taken on the basis of R:R rather than probabilitiy of the trade. I would always take a large position even if the reward were very small than the risk (maximum draw down till the end of first review period) if the probability is very very high.

The moment you have the SL idea in the mind, the trades with not very high probability, equal probability or even low probability are undertaken as you evaluate the decision to enter on the basis of R:R and not the probability of outcome.

Not using SL (certainly one should use the CSL though) will direct all your engery and focus on taking the HIGH probability trades. You wait till you have a pattern/trend in the random movement of the market and grab the opportunity with both the hands.

Another analogy here is the Law of the land, which states that the law may not punish a criminal (by giving benefit of doubt) just to ensure that no innocent is punished. Similarly, there one would let go and lose many high probability trades (as one may not be fully convinced at that point of time) but this would ensure that wrong trades are not undertaken.

And it is much easier to exit such fully convinced trades too, because it is very very easy to identify the indications that your predicted direction may not happen. Hence, easier to exit immediately and abort the mission praising the Law of the land.

My conclusions:

- Putting SL on trades directs you to undertake any probability trade as primarily there is a soothing feeling that you will be stopped soon and not bear large loss. (Forgetting that the whole idea here is to make money and not exit at 'small' loss)

- Lot of such 'small' loss (due to poor selection of trades) result into a sizeable loss, which may get covered in some good trades, but we have lost time and other great opportunities in between. End of the month where are we? At the same place, or just somewhere near.

- And this make a lot of difference between a super trader (who wins many, loses some), a regular net profitable trader (who wins some, loses some) or a net loser trader (who wins some, loses many)


Regards,