[Day Trading Poll] Are Stop Losses for Suckers???

Do You Use a Stop Loss When Day Trading?


  • Total voters
    11
G

GetRichOrDieTrying

Member
After reviewing price data from up to 10 days after taking losses on day trades I've made in the past year and a half, I discovered that every single one of my losses would have resulted in a profitable trade had I held onto my losing position for up to 10 days after the buy. That time frame was the maximum amount of time that passed before my unrealized loss would turn profitable from price going up over a maximum of a 10-day period.

All that being said, I've come to the conclusion that Stop Losses are the reason why most day traders are unprofitable. I'm a momentum day trader. On over 75% of my trades, I get the direction right. When I have a loss from getting stopped out, price generally dips down for a moment, stops me out, and then goes up again.

I admittedly think that the phrase "Stop Losses are for Suckers" is borderline insane. However, I think it makes sense if you abide by the following rules:

  1. Only trade stocks of companies that you know really well. Ideally, they have strong fundamentals, which lend themselves to having a high probability of increasing in price over time. Strong fundamentals should include: Meaning, Moat, Solid Management, and a Margin of Safety. If you have no idea what I'm talking about, read Phil Towns book: Rule #1 Investor

  2. Beware of high volatility stocks - Avoid penny stocks or stocks with high volatility. If a stock can go up in value by 100% in a day, it can also go down by that much in a day as well. The last thing you want is to wake up and see that an after-hours news headline caused your stock to crater overnight. Such is the case with penny stocks and biotech stocks

  3. Only trade an amount of money you are willing to lose - This goes without saying, but the longer you hold onto a position, the more risk you are taking that the market will go against you. That being said, you need to size your position relative to an amount you are willing to lose. If you're trading a stock with strong fundamentals and reasonable levels of volatility, it's highly unlikely that a stock will lose more than 50% overnight, or over the course of a few days or weeks. Even during the worst recessions, the market overall has never lost more than 50% in a short-time frame, although it came close with Covid-19, with a 35% retracement that happened over 2 weeks, only to be followed up by a 25% rally over the next 30 days.

    As an example, let's say that you're looking to buy ABC Stock at $20/share, and you don't want to lose more than $1,000. Based on my assumption of a max loss of 50%, the most you'd likely lose in unrealized losses is $500 if you purchased $1,000 worth of shares. That being said, if you're willing to loss $1,000, you can actually buy $2,000 worth of ABC Stock.

  4. The short-term momentum is bullish - This is where multi-time frame analysis comes in. When I day trade. I use a 15M chart to determine the long-term trend. I use a 5M chart to determine momentum, and I use a 1M chart to time my entry. If I'm going to be willing to hold onto losses, I'm also going to want to see a strong bullish trend on the 1H, 4H, and maybe even the Daily chart to feel confident about holding a loser for a few days or weeks.

  5. Bonus: Since index ETF's are rigged to the longside, you could consider trading TQQQ (Nasdaq 3X Leveraged). However, don't hold it for more than a few weeks, as there is a time decay factor that dynamically adjusts price over time. It's very complicated to explain, and I'm not smart enough to explain it, so look it up if you'd like to learn more.
So when do you take profits?
You would take profits based on your risk multiple. However, you would disregard the stop loss portion of the risk multiple. If you're not sure how to position size with risk multiples check out Adam Khoo's videos on YouTube.

Essentially it goes like this: If the most you're willing to lose on a single trade is $100, then your profit target would $200. By having a profit target that is twice the amount of your loss, you can loss 50% of the time and still be a profitable trader. Since we're disregarding the stop loss, we're leaving ourselves open to losing our entire position. Remember though, we're willing to take on that risk if all of the above criteria has been met. If such is the case, it's more likely than not, that price will eventually go up over the next few days or weeks. You'll just have to be patient and wait.

With a $200 profit target, you would stay in the trade until you hit or exceed that goal, then you would sell your position, and rinse and repeat everyday. On days when the trade goes against you, and you're in the red, you can choose to wait a few days or weeks until you're green again, or you can continue trading each day and leaving the losing position alone until it hits break even or turns positive.

In an ideal scenario, you would hit or exceed your profit target 75% of the time or more, while the remaining 25% of the time, you're holding onto unrealized losses until price goes up again.

In Conclusion:
When you boil it all down, what I'm essentially saying is... If you're able to accurately and consistently determine the direction of the market, why take a loss from being prematurely stopped out, just because you misjudged the exact moment of a reversal, when timing the market is so extremely difficult.

In theory, if you're trading a stock that has strong fundamentals, the worse case scenario is that you have to hold onto an unrealized loss for a few days until it inevitably reverses and you're in the green. When you really think about it, taking losses from arbitrary stops as a day trader is more of a reflection on fear and impatience as opposed to risk management. You might think you're managing risk by setting stop losses, but what you're really doing is donating your money to professional traders and hedge fund trading bots.

What are thoughts on this? Please take the poll and comment below. I'd really like to know what the community thinks. I'm going to test out this theory by Paper Trading this strategy over the next 30 days, and report back. You should join me.
 
T

TrueDepth

Member
VIP
No, you must have a stop. Either your trade is correct or it is not. You have to put the stop in the right place though. I have noticed that when daytrading most of the time, you will get an entry bar, then the stock will go, then come right past the close of that entry bar to stop anyone who put a stop there, then go the direction.

You can't put the stop at your entry. You have to risk that it goes below your entry. OR you can wait for that first pullback, with the risk being it might never pullback and you missed the entry completley.
 
G

guyonabuffalo

New member
Not having a stop is a surefire way to completely blow up your account, especially if you're trading futures.

If the trade goes against you then take your stop and wait for it to setup again.
 

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