Originally Posted by mtardif
Hey mp6140, I have been doing financial modelling and I'll have to say that I am coming to the same conclusion that you have, which is that using stop losses is going to cause you to lose in the long run. By "in the long run", I mean 5+ years.
Im gonna go you one better -- depending on how you trade (scalp, flip or swing) a stop loss can do you horrible damage in just a few hours or less. If you are playing the 30 min chart LONG for instance and in PARTICULAR if youre using the Heiken Ashi technique, you can easily suffer a reversal that could cost you an awful lot -- If youre trading GU, to set a stop loss LESS than 75 pips would be total lunacy, but then you would LOSE those 75 pips FOREVER if it were hit !
Any EA that I have conceived that does not use stop losses manages to produce an uptrending equity curve over 5+ years. An EA that uses stop losses, at best, see-saws back and forth over the original starting balance. Sure, over a period of a few months you might have an uptrend, but in the long run, the best I can come up with is a sideways equity channel. You win some, you lose some, you lose some, you lose some....
Once again, I do not believe one needs to wait 5 years to see what happens, as I have helped people who have had half their account wiped out overnight by a stoploss being hit (either by broker fishing or just plain truth -- whichever still costs you money you have to work for to replace !) Secondly, unless youre working with an EA that will place LONG trades, sell and then place a SHORT trade and then cover, youre gonna suffer DRAWDOWNS and those DRAWDOWNS used with a classic stoploss are what destroys most accounts !
As for "you MUST be trading in the direction of at least ONE of the 3 normal trends", can you elaborate? I'm assuming by "normal trends" you mean taking long positions when the 4-hour, daily and weekly chart are all signalling uptrends, and then you buy a dip on the 4-hour chart, and vice-versa for short positions? That is what I am modelling at the moment.
Actually, youve asked a question that opens up a complete chapter in trading --- In this situation, I was referring to the H4, DAILY AND WEEKLY TRENDS as you caught, but it can also (once again, dependent on the timeframe youre trading) refer to the lower "normal" timeframes if they set up in the same positive order ! You are also correct in your "buying the dip"assumption, but that ALSO applies to ANY timeframe one is working with !
Theres a neat little indicator called "digistoch" which shows what direction ALL the timeframes are moving in on ONE chart -- HANDY for those who dont use multiple monitors and multiple charts !
Congrats --- youre one of the few who understand, at first blush, what Im trying to convey !
And that "money management" means assume you'll get caught in an unfavourable move and so don't risk all your equity on the one trade. Defining a trade as "one or more positions", meaning that you need capital reserves to "scale into the trade" as you add long positions on subsequent dips to lower your break-even price? (Which is what "they" tell you not to do?)
LOOK, why on earth did I bother to write this post if youve got all the correct answers ALREADY ??????? (LOL)
Yes, EXACTLY CORRECT ! While trading longer term is usually the least risky trade, compared to a short term trade (3 - 6 pips), one uses LESS equity or margin on the LONG TERM TRADE because of the GREATER RANGE (greater drawdowns) that long term trades move. Essentially, because of the shortened range in a short term trade, one can afford to risk larger amounts, which SHOULD NOT be done with a long term trade !)
NOW, Ive been caught badly at times holding 20 lots of XYZ LONG, and based on whatever stupid reason (usually MY stupidity) the pair DROPS like a rock as has UJ friday --- in that situation I patiently wait and wait and wait for the bottom (and that MAY NOT BE till the next day at the least) and then I BUY 40 or more lots) or I "SCALE" into the trade as you mention ! (without getting crazy about things, I'm awfully good at finding support and resistance, AND there are some swell indicators out there that can assist, so where I have "scaled", its usually because I was fooled in some way !)
BUT, ONE MUST NEVER NEVER NEVER EXCEED THEIR SAFE MONEY MANAGEMENT LEVEL -- I was stuck in a trade that sat for 4 days with a $7500 paper loss -- fridays activity closed the trade with a 2800 profit on that part of the trade, just because I waited and didnt give the money to a "stop loss" !!!
I must congratulate you because it take a lot of guts to come in and "just say no to stop losses". Most people just take that "always set a stop-loss" as some kind of 11th commandment handed down to Moses on the mountain. Don't mess with it. I am willing to explore different strategies. I am willing to not listen to "conventional wisdom". I am exploring lots of "what if" scenarios. I am doing my research and my modelling and so far my results point me towards the "no stop-loss coupled with excellent money management" as the only strategy that produces an uptrending equity curve "in the long run".
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