Stop loss selection

[uasish]

Those who pursue quantitative analysis of the markets tend to fall into 2 distinct camps.

1)In one camp reside those who believe that future price can be predicted by the past.

a)Support / Resistance
b)Pattern
c)Elliot Wave
d)Mkt Profile
e)Etc.


2)In the other are those who believe that change in price is entirely random.

a)Statistical Analysis
b)Efficient Mkt.
c)Random Walk Theory
d)Etc.

These two groups tend to position themselves at polar extremes.:devilgrin:

In a broad simple terms QAnalysts who believe Mkt can be forecasted by analysizing past actually believe MKT IS STRUCTURED.

The other group of QAnalysts believe MKT IS RANDOM.

 

[uasish]

SL are integral part of trading,rather one has to find the SL point before making the Entry.Every one of us use this everyday.What should be the Crieterion,how do we know that what we are using presently is right.

Oflate heard SAR (Stop & Reversal) and many are reversing their Trade Direction from there.How do they decide from what Price point they have to reverse ,any Logic / Science behind that,or is it decided arbitarily.

We spend lots of time to learn TA have we spent that much time on Methodology to find out Stop.

 

[uasish]

The size of the potential loss
.......................................

As we all know if i loose 10 % say Rs 10.00 from my Rs 100.00 then my capital Rs 90.00 when gains 10% becomes only Rs 99.00 still 1 % less.

The formula to calculate this will be:=

%Gain Needed = %Loss/(1-%Loss)


The probability of recovery over time
.................................................

A Statistical Estimation formula would be.

1 - [ In(x/(1-x))-Time*meu /(dividedby) std deviation* rootover Time ]

With this formula plz note that on average, the probability of recovering an 8% loss in the span of a week is almost zero. The shorter the time frame, the less likely we are to recover a loss.


Defined risk vs. undefined risk
........................................

Supppose we compare Buy & Hold with our Module of Stop Loss.
Now we create a world in which price moves up or down one price unit per day. A coin-flip determines the outcome of each day. The rules of the game
are as follows:

1) Flip a coin. If heads, then price increases one unit. If tails, then price decreases one unit
2) For Stop-Loss– If heads, hold position. If tails, sell position
3) For Buy-and-Hold— Hold position regardless of price action

With the above analogy let us see what Maths tells us.

Stop Loss:=
P = Probability of up day,(p);
Profit = [Profit Per Trade] = (2p-1)/(1-p)
Days = [Days Held per Trade] = 1/(1-p)
Maximum Loss Per Trade = -1
Avg. Profit Per Trade Per Day = Profit/Days
= (2p-1)


Buy-and-Hold:=
P = Probability of up day, (p);
n = Days till position exit
Profit = [Profit Per Trade] = n(2p-1)
Days = [Days Held] = n
Maximum Loss Per Trade = -n (a number with no natural limit)
Avg. Profit Per Trade Per Day = Profit/Days
= (2p-1)

What we get average profit-per-trade-per-day using the stop-loss is the same as buy-and-hold, (2p-1). But there is one important difference. The stop-loss reduces risk-per-trade because the maximum loss is defined as –1.
Where as the maximum loss using buy-and-hold is –n, (no defined limit). A stop-loss DEFINIES OUR RISK.

So we choose to use a stop-loss for the following reasons:=

A:= A given loss requires an even greater percentage gain to recover.

B:= Probability of recovery declines as losses mount and as time grows short.

C:= A stop-loss defines our risk.

N.B. From Net collected Formulas from Renowned Mathametician or Statistian
projects / books etc.

 

[uasish]

So from the above what do we get :=

1st we have considered Price is truly Random.

When Price is random a Buy & Hold vis-a-vis Stop Loss has same probability but Buy & Hold has potentiality of MAXIMUM LOSS (which is negative n ),where as Stop Loss has MAXIMUM LOSS of -1 (Like Option premium i paid is my max loss).

Probability of my recovery is again a long extended T (T= Time ),means the More the Stop Amount say 35 points for Nfty Future ,if that is Hit then i would require MORE TIME to recover my Loss when the chance of Stop Hit is 50:50.

Lastly Stop HAS to be difined before taking a trade.

 

[uasish]

Now if time permits next week may continue this to find what should be a logical solution to find a stop both as per 'Structured Mkt' OR 'Random Mkt'.

It can in NO way be decided by a Messiah or Hunch.

 

[NOMINDTR]

Now if time permits next week may continue this to find what should be a logical solution to find a stop both as per 'Structured Mkt' OR 'Random Mkt'.

Welcome Ashishda

 

[uasish]

Welcome Ashishda

Thks ,never left,just relinquished from Moderator responsibilty and due to my other interest has become less frequent HERE.

 

[NOMINDTR]

Thks ,never left,just relinquished from Moderator responsibilty and due to my other interest has become less frequent HERE.

I said I welcome more posts in this thread :lol:

 

[uasish]

Pardon me for misunderstanding the post,thks .

 

[NOMINDTR]

Pardon me for misunderstanding the post,thks .

I could have been more clear.