Stops: When to get out of a losing position

Stops: When to Get Out of a Losing Position
Traders who do not cut their losses will not be successful in the long term.
长远来看,不懂得止损的交易者将不会成功.
The most important thing about cutting your losses is to predefine the point at which you will get out before you enter a position.
关于止损最重要的一点是,在你建仓之前,要预先确定你的止损点.

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Stops
There is an expression: “There are old traders and there are bold traders, but there are no old bold traders.”
Most traders who do not use stops go broke.
大多数不使用止损的交易者都会破产.
The Turtles always used stops.

For most people, it is far easier to cling to the hope that a losing trade will turn around than it is to get out of a losing position and admit that the trade did not work out.

Let me make one thing very clear: Getting out of a losing position when the rules of a system dictate doing that is critical.
Traders who do not cut their losses will not be successful in the long term.
Almost all the examples of trading that got out of control and jeopardized the health of the financial institution, such as Barings and Long-Term Capital Management, involved trades that were allowed to develop into large losses because they were not cut short when they were small losses.

The most important thing about cutting your losses is to have predefined the point where you will get out before you enter a position.
If the market moves to your price, you must get out, no exceptions, every single time.
Wavering from this method eventually will result in disaster.

Note: The reader may have noticed an inconsistency between my comments here and those in Chapter 10, where I noted that adding stops sometimes harms system performance and is not always necessary.
The systems outlined previously which work well without stops do have an implicit stop because as the price moves against the position there will come a point where the moving averages will cross and the losses will be limited.
So in a sense, there is a stop, it is just not one that is visible or known to the trader.
For most people, however, the psychological comfort of having a price point where they will exit a losing trade is important.
This is especially true of beginners.
It can be psychologically destabilizing to watch a position go against you without having a clear view of the point where the pain will end.

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Turtle Stops
Having stops did not mean that the Turtles always had actual stop orders placed with the broker.

Since the Turtles carried such large positions, we did not want to reveal our positions or our trading strategies by placing stop orders with brokers.
Instead, we were encouraged to have a particular price that when hit would cause us to exit our positions by using either limit orders or market orders.

These stops were nonnegotiable exits.
If a particular commodity traded at the stop price, the position was exited each time, every time, without fail.

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Stop Placement
The Turtles placed their stops on the basis of position risk.
No trade could incur more than 2 percent risk.

Since 1N of price movement represented 1 percent of account equity, the maximum stop that would allow 2 percent risk would be 2N of price movement.
Turtles’ stops were set at 2N below the entry for long positions and 2N above the entry for short positions.

To keep total position risk at a minimum, if additional units were added, the stops for earlier units were raised by 1⁄2N.
This generally meant that all the stops for the entire position would be placed at 2N from the most recently added unit.
However, in cases in which later units were placed at larger spacing because of either fast markets causing skid or opening gaps, there would be differences in the stops.

Here is an example.
Crude Oil
N = 1.20
55-day breakout = 28.30
                Entry Price       Stop
First unit      28.30             25.90
                Entry Price       Stop
First unit      28.30             26.50
Second unit     28.90             26.50
                Entry Price       Stop
First unit      28.30             27.10
Second unit     28.90             27.10
Third unit      29.50             27.10
                Entry Price       Stop
First unit      28.30             27.70
Second unit     28.90             27.70
Third unit      29.50             27.70
Fourth unit     30.10             27.70

Here is a case in which a fourth unit was added at a higher price because the market opened gapping up to 30.80:
                Entry Price       Stop
First unit      28.30             27.70
Second unit     28.90             27.70
Third unit      29.50             27.70
Fourth unit     30.80             28.40

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Alternative Stop Strategy: The Whipsaw
The Turtles were told about an alternative stop strategy that resulted in better profitability but was harder to execute because it incurred many more losses, which resulted in a lower win/loss ratio.
This strategy was called the Whipsaw.

Instead of taking a 2 percent risk on each trade, the stops were placed at 1⁄2N for 1⁄2 percent account risk.
If a particular unit was stopped out, the unit would be reentered if the market reached the original entry price.
A few Turtles used this method with good success.

The Whipsaw also had the added benefit of not requiring the movement of stops for earlier units as new units were added, since the total risk would never exceed 2 percent at the maximum 4 units.

For example, using Whipsaw stops, the crude oil entry stops would be as follows:
Crude Oil
N = 1.20
55-day breakout = 28.30
                Entry Price       Stop
First unit      28.30             27.70
                Entry Price       Stop
First unit      28.30             27.70
Second unit     28.90             28.30
                Entry Price       Stop
First unit      28.30             27.70
Second unit     28.90             28.30
Third unit      29.50             28.90
                Entry Price       Stop
First unit      28.30             27.70
Second unit     28.90             28.30
Third unit      29.50             28.90                
Fourth unit     30.10             29.50

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Benefits of the Turtle System Stops
Since the Turtles’ stops were based on N, they adjusted for the volatility of the markets.
More volatile markets would have wider stops, but they also would have fewer contracts per unit.
This equalized the risk across all entries and resulted in better diversification and more robust risk management.