6 ms·

I've never understood how stop losses are supposed to help. Traders read heaps of news, do God knows what technical analysis yet simple "moves bit too much in w

by Lapsa 4y ago

I've never understood how stop losses are supposed to help. Traders read heaps of news, do God knows what technical analysis yet simple "moves bit too much in wrong direction" is supposed to be an acceptable exit strategy.

tasuki 4y ago
Same! When it's $100 I want to buy, but if the price falls to $80 i want to sell. Presumably i bought because I thought it was worth more than $100, it would only make sense for me to sell at $80 for a reason other than the price: fundamentals change, some bad event happening. If the only thing that changed is the price, I want to buy more at $80!
- googlryas 4y ago
  The price going from 100 to 80 is more information which can help inform your understanding of the value.
Gustomaximus 4y ago
It's about recovery. A loss of 10 percent necessitates an 11 percent gain to recover. Increase that loss to 25 percent and it takes a 33 percent gain to get back to break-even. A 50 percent loss requires a 100 percent gain to recover and an 80 percent loss necessitates 500 percent in gains to get back to where the investment value started.
- hgsgm 4y ago
  [dead]
- baobabKoodaa 4y ago
  That doesn't answer the question or relate to the topic at all.
  - Gustomaximus 4y ago
    That doesn't relate to not understanding how stop losses help?
hervature 4y ago
You're missing the bit that "moves bit too much in wrong direction" is a strong signal that your analysis is fundamentally flawed. Maybe catastrophic news came out since you bought in.
- Lapsa 4y ago
  Those are 2 additional reasons to exit - realization that analysis is bad and catastrophic news. And they ain't automated.
- hgsgm 4y ago
  [dead]
- baobabKoodaa 4y ago
  Even if you decide you need to exit, why do you think you will get the best possible price for your exit with a market order? (which is what a stop loss essentially is) There are other ways to exit a position.
this_user 4y ago
Professionals always have an exit strategy before they even enter a trade. That exit strategy contains conditions under which you assume the trade is no longer good, and needs to be exited at a loss. Stop-losses are one mechanism for implementing that, but they are crude, and big players don't actually use them. In that regard, she was correct. For one thing, if you trade size, you don't want to dump everything with a marketable order at once, you have to scale out even if you are wrong. Secondly, some strategies will always perform worse if you add stop loss levels, notably mean reversion. But they can make sense, for instance, for trend following, because there are clear levels at which you can say that a trend has ended. Lastly, high-frequency traders like market-making firms, which Alameda was supposed to be, don't use stop loss orders, because they are not trying to take directional bets, they are just trying to capture the spread while keeping their book balanced.
super256 4y ago
If you trade highly leveraged stuff, you need stop losses; otherwise there is a considerable chance you will go bankrupt. Especially when you take bets on interest rate decisions, take the sweeps at market open and other stuff (you can gain a few hundred points on NQ1! per contract easily during such times). Also, it's a psychological thing: traders think in risk. If they were mistaken with a trade idea, they close the position with a small loss. Easy, just move on to the next! But when a position is already deep in the reds, it becomes increasingly harder to press the "close"-button and realize the loss. I know somebody who lost a few hundred grand just a few weeks ago because he was unable to close the position. He didn't set an initial stop loss, and then started believing in his trade (or the company) too much, although the market was telling him otherwise. He started doing dollar cost averaging and other stupid stuff. Actually, this guy is incredibly smart, but became too attached. I feel genuinely sorry for him. But that's what happens, when you don't have the discipline.
- nradov 4y ago
  Stop loss orders can work reasonably well for retail investors trading small positions in liquid securities, but they aren't completely reliable. Sometimes prices make a sudden discontinuous drop on bad news and blow past the limit order before it can be executed. Or if trading is halted they become useless. And for institutional investors trading large positions in less liquid markets, stop loss orders barely work at all. They usually employ more sophisticated hedges.
  - dragonwriter 4y ago
    Sure, and a helmet and bulletproof vest with trauma plates doesn’t stop you from getting killed by shot in the face. But the lack of complete protection is a pretty bad argument against using the available protection. (There's some things a stop-limit is better for than a regular stop loss, but I'm not convinced that they are generally superior except in the technical sense that any stop loss can be issued as a stop-limit with a $0 limit.)
    - KMag 4y ago
nullc 4y ago
Indeed, stop-loss orders are extremely dangerous and shouldn't be offered. A stop-loss-limit is better in that it makes the potential consequence of a stop-loss more clear: You could set a stop loss limit order with a limit of $0 to create a standard stop loss-- making it explicit that you're willing to potentially sell the asset for $0/share: which is what a stop loss is willing to do. (+/- market circuit breakers, which generally don't exist in cryptocurrency markets.) If it's not immediately apparent why stop losses are a hazard: When markets are volitile the supply of standing orders near the spread tends to thin out-- for some assets, like the worthless magic beans FTX and friends specialized in owning, the markets are never particularly thick. What a stop loss order will do is once the market ticks below your threshold it will dump into a market order. Market prices are not continuous. If someone sold at $100 that doesn't mean you can sell at $100-- a market sale might be at $80-- locking in a substantial loss that otherwise would have been a momentary blip and never impacted you. These orders essentially automate one of the worst practices of inexperienced investors that result in loss: panicking at every dip and selling at a loss when nothing fundamental has changed. What joe-sixpack thinks a stop loss will do is guarantee him a floor price. It will not. Joe could buy put contracts to create a guaranteed floor price but they cost money-- that cost is a direct sign of how much stop loss orders do not work. A stop-loss-limit at $100/$100 would do what was expected if it executes but it usually won't execute except when the price dips and then recovers-- the case where you would have preferred to have your stop loss not exist at all. Seldom do people want a "Sell my stuff at $100/share if the price gets under $100 but only when it recovers"-- that would probably only be justifiable to the extent that the drop showed your thesis about the investment was wrong. Fundamentally the guarantee people want here can only be had at a price, and paying that price is a reasonable part of risk management. If you're trading very small amounts of very liquid items on highly surveilled and regulated markets then perhaps you can get away with using them without getting too greatly burned. But at the same time puts for the same assets are usually fairly inexpensive. In the cryptocurrency sphere it's just not that unlikely that 'exchanges' (particularly bucket shops like FTX where the exchange is substantially the counterparty in the activity) has some script that counts up all the users stop loss orders and figures out how much profit they could make causing a momentary blip in the trading price just to trigger them. There are plenty of people in the industry that don't believe it would be unlawful to do so, seeing as how the traded assets aren't securities. (and IIRC long before FTX's collapse there was a lawsuit alleging that they engaged in that kind of manipulation) So mocking the stop loss comment seems a bit misplaced, but it's worth noting that the question was really about risk management and she didn't give a useful answer to the intended question either-- especially since the rubbish they owned was hard to impossible to risk manage and for good reason.
bmitc 4y ago
But the phrase “cutting your losses” has application does not? A stop loss could be set at a threshold that isn’t so tight to lose money on normal variations, low enough if it’s acceptable to take the loss and and capture and deploy the capital elsewhere, and not too low to never be triggered.
- baobabKoodaa 4y ago
  > But the phrase “cutting your losses” has application does not? A "stop loss" does not mean the same thing as "exiting a position to cut your losses". There are other ways to exit a position. If you have a large position, then exiting via market order (which is what a stop loss does) is going to give the worst possible price for your exit.

by Lapsa 4y ago

tasuki 4y ago

Same! When it's $100 I want to buy, but if the price falls to $80 i want to sell. Presumably i bought because I thought it was worth more than $100, it would only make sense for me to sell at $80 for a reason other than the price: fundamentals change, some bad event happening. If the only thing that changed is the price, I want to buy more at $80!

googlryas 4y ago
The price going from 100 to 80 is more information which can help inform your understanding of the value.

Gustomaximus 4y ago

It's about recovery. A loss of 10 percent necessitates an 11 percent gain to recover. Increase that loss to 25 percent and it takes a 33 percent gain to get back to break-even. A 50 percent loss requires a 100 percent gain to recover and an 80 percent loss necessitates 500 percent in gains to get back to where the investment value started.

hgsgm 4y ago
[dead]
baobabKoodaa 4y ago
That doesn't answer the question or relate to the topic at all.
- Gustomaximus 4y ago
  That doesn't relate to not understanding how stop losses help?

hervature 4y ago

You're missing the bit that "moves bit too much in wrong direction" is a strong signal that your analysis is fundamentally flawed. Maybe catastrophic news came out since you bought in.

Lapsa 4y ago
Those are 2 additional reasons to exit - realization that analysis is bad and catastrophic news. And they ain't automated.
hgsgm 4y ago
[dead]
baobabKoodaa 4y ago
Even if you decide you need to exit, why do you think you will get the best possible price for your exit with a market order? (which is what a stop loss essentially is) There are other ways to exit a position.

this_user 4y ago

Professionals always have an exit strategy before they even enter a trade. That exit strategy contains conditions under which you assume the trade is no longer good, and needs to be exited at a loss. Stop-losses are one mechanism for implementing that, but they are crude, and big players don't actually use them. In that regard, she was correct. For one thing, if you trade size, you don't want to dump everything with a marketable order at once, you have to scale out even if you are wrong. Secondly, some strategies will always perform worse if you add stop loss levels, notably mean reversion. But they can make sense, for instance, for trend following, because there are clear levels at which you can say that a trend has ended. Lastly, high-frequency traders like market-making firms, which Alameda was supposed to be, don't use stop loss orders, because they are not trying to take directional bets, they are just trying to capture the spread while keeping their book balanced.

super256 4y ago

If you trade highly leveraged stuff, you need stop losses; otherwise there is a considerable chance you will go bankrupt. Especially when you take bets on interest rate decisions, take the sweeps at market open and other stuff (you can gain a few hundred points on NQ1! per contract easily during such times). Also, it's a psychological thing: traders think in risk. If they were mistaken with a trade idea, they close the position with a small loss. Easy, just move on to the next! But when a position is already deep in the reds, it becomes increasingly harder to press the "close"-button and realize the loss. I know somebody who lost a few hundred grand just a few weeks ago because he was unable to close the position. He didn't set an initial stop loss, and then started believing in his trade (or the company) too much, although the market was telling him otherwise. He started doing dollar cost averaging and other stupid stuff. Actually, this guy is incredibly smart, but became too attached. I feel genuinely sorry for him. But that's what happens, when you don't have the discipline.

nradov 4y ago
Stop loss orders can work reasonably well for retail investors trading small positions in liquid securities, but they aren't completely reliable. Sometimes prices make a sudden discontinuous drop on bad news and blow past the limit order before it can be executed. Or if trading is halted they become useless. And for institutional investors trading large positions in less liquid markets, stop loss orders barely work at all. They usually employ more sophisticated hedges.
- dragonwriter 4y ago
  Sure, and a helmet and bulletproof vest with trauma plates doesn’t stop you from getting killed by shot in the face. But the lack of complete protection is a pretty bad argument against using the available protection. (There's some things a stop-limit is better for than a regular stop loss, but I'm not convinced that they are generally superior except in the technical sense that any stop loss can be issued as a stop-limit with a $0 limit.)
  - KMag 4y ago

nullc 4y ago

Indeed, stop-loss orders are extremely dangerous and shouldn't be offered. A stop-loss-limit is better in that it makes the potential consequence of a stop-loss more clear: You could set a stop loss limit order with a limit of $0 to create a standard stop loss-- making it explicit that you're willing to potentially sell the asset for $0/share: which is what a stop loss is willing to do. (+/- market circuit breakers, which generally don't exist in cryptocurrency markets.) If it's not immediately apparent why stop losses are a hazard: When markets are volitile the supply of standing orders near the spread tends to thin out-- for some assets, like the worthless magic beans FTX and friends specialized in owning, the markets are never particularly thick. What a stop loss order will do is once the market ticks below your threshold it will dump into a market order. Market prices are not continuous. If someone sold at $100 that doesn't mean you can sell at $100-- a market sale might be at $80-- locking in a substantial loss that otherwise would have been a momentary blip and never impacted you. These orders essentially automate one of the worst practices of inexperienced investors that result in loss: panicking at every dip and selling at a loss when nothing fundamental has changed. What joe-sixpack thinks a stop loss will do is guarantee him a floor price. It will not. Joe could buy put contracts to create a guaranteed floor price but they cost money-- that cost is a direct sign of how much stop loss orders do not work. A stop-loss-limit at $100/$100 would do what was expected if it executes but it usually won't execute except when the price dips and then recovers-- the case where you would have preferred to have your stop loss not exist at all. Seldom do people want a "Sell my stuff at $100/share if the price gets under $100 but only when it recovers"-- that would probably only be justifiable to the extent that the drop showed your thesis about the investment was wrong. Fundamentally the guarantee people want here can only be had at a price, and paying that price is a reasonable part of risk management. If you're trading very small amounts of very liquid items on highly surveilled and regulated markets then perhaps you can get away with using them without getting too greatly burned. But at the same time puts for the same assets are usually fairly inexpensive. In the cryptocurrency sphere it's just not that unlikely that 'exchanges' (particularly bucket shops like FTX where the exchange is substantially the counterparty in the activity) has some script that counts up all the users stop loss orders and figures out how much profit they could make causing a momentary blip in the trading price just to trigger them. There are plenty of people in the industry that don't believe it would be unlawful to do so, seeing as how the traded assets aren't securities. (and IIRC long before FTX's collapse there was a lawsuit alleging that they engaged in that kind of manipulation) So mocking the stop loss comment seems a bit misplaced, but it's worth noting that the question was really about risk management and she didn't give a useful answer to the intended question either-- especially since the rubbish they owned was hard to impossible to risk manage and for good reason.

bmitc 4y ago

But the phrase “cutting your losses” has application does not? A stop loss could be set at a threshold that isn’t so tight to lose money on normal variations, low enough if it’s acceptable to take the loss and and capture and deploy the capital elsewhere, and not too low to never be triggered.

baobabKoodaa 4y ago
> But the phrase “cutting your losses” has application does not? A "stop loss" does not mean the same thing as "exiting a position to cut your losses". There are other ways to exit a position. If you have a large position, then exiting via market order (which is what a stop loss does) is going to give the worst possible price for your exit.