William MacDona...'s  Instablog

William MacDonald (Ps. amiablefool billofsanantonio@att.net
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  • TO STOP OR NOT TO STOP 0 comments
    Apr 6, 2009 12:00 PM

    A new book by Larry Connors and Cesar Alvarez entitled "Short Term Trading Strategies that Work" , published by TradingMarkets Publishing Group is an interesting read and makes several points I have not heard before. One of these and the one I think the most controversial has to do with the use of stop orders.

    Mr.Connors like most everyone who trades had always used and advocated the use of stops when entering trades.  In 2005 his group started runing computer back tests with the object of finding an optimal level for placing their stops.  What they found was completly opposite of what they expected.  They found that stops hurt more than helped.  Hundreds of tests on tons of historical data showed significant detrimental effect on the outcome of trades.  He concludes that "stops hurt".

    Trades were tested with stops close to and as far as 50% away from the entry price and all had a negative effect on performance.   The closer the stops were the more negative was the performance but even the stop 50% away had a measureable negative effect.   Their research is extensive and their conclusions are hard to explain and raises many questions.   Is the whole idea of limiting risk to the downside while hoping for a better upside not sound?  Would mental stops if properly used not have the same negative effect?  

    For me trading without stops would be like driving without a seat belt.  I would feels exposed to danger.  It sometimes happens on Seeking Alpha that the comments are more enlightening than the artricals.  I hope this is one of those times.  Someone in Seeking Alpha Land may be able to shed light on this. 

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