BarroMetrics Views: Stop Losses – Should they be Adopted
There have been a series of reports in the net that have suggested that stop losses ought not be used since they reduce the bottom line rather than help it e.g. http://trading.it.bond.edu.au/ where Bruce Vanstone is writing a 3-part series: “Stop Losses – Help or Hindrance?
Many traders I like and respect do not use stops e.g. Pete Steidlmayer (originator Market Profile), Rob Hanna (Quantifiable Edge) , but for me stops are a must. I would add, stops are a must for traders who are not profitable.
But let’s talk about what I DON’T mean by stops. I don’t mean you place willy-nilly a stop anywhere; and I don’t mean you place a money stop. Random stops are likely to have adverse results on your theoretical bottom line.
Now let’s talk about what I do mean by stops: exit points render the reason for the trade invalid. For example on a sell on a breakout and bullish conviction close on the Primary Buy Zone would mean a probable move to the Primary Sell Zone. So such a close negates the reason for the breakout trade.
Most of the studies I have seen tend to look at some form of random stop. It’s no wonder then that the studies show ‘no stops’ are better than ‘stops’.
But that is not the main reason why I advocate the use of stops. I advocate them because in the trenches of trading, few novices are able to exit on pre-determined conditions.The traders I mentioned that do not use stops do use these conditions have the will to execute the exit when the conditions occur no matter the dollar loss.
In the time I have spent training, I have seen few newbies able to exercise the same sort of discipline. What I have seen is hundreds of thousands dollars lost because the newbie refuses to exit a losing trade. I have seen very few accounts (actually only one comes to mind) that blew their accounts with incremental losses. The rest blow their accounts in one or two trades.
So in my view: have stops, they’ll probably save your account.