Weekend Update: A Conversation About Stops

by Blue Line Trading January 27, 2018

There are a few very successful professional traders who subscribe to my services, one in particular a friend of over 25 years. We actually met on an Internet stock market forum, the Prodigy "Hypotheticals" forum in the early 1990's. From time to time we have shared trading ideas and even collaborated on certain trading strategies. He came to town a few weeks ago and shared with me some of what he is doing now (hint: bitcoin), but also showed me how he has adapted Blue Line to fit into his own trade management preferences.

The biggest difference with how he trades the system is he throws out the stop strategies in their entirety. He doesn't use any particular rules for exiting trades, instead relying on what best can be described as his, "gut feel," for how the trade is unfolding. His overall results blows our official results away. My first response was that he's been trading for three decades and of course he has developed that, "gut feel," beyond what any rules can achieve. But then he made a statement that may very well be something that we can integrate into our trading to improve results.

What follows is more of a paraphrase than the actual conversation, and it went on and off for the entire two days he was here in Arizona....and we were sober for most of it. For what it's worth, take a listen:

"Allan, if I have learned nothing else from trading it is that stops don't work, they degrade results, always, and this is true for any system I have ever tried. I don't care when your system stops itself out and although I understand when it does, but your stops have no brains, they are just math.

"Yep, they are just math. But they are there to avoid the occasional disaster and to keep profits from slipping away and for that, they work.

"You can do better. Look at that S&P trade, best trade of the year and you got stopped on a ridiculous spike down on a news headline. The math was there, it was wrong, watching the trade unfold the move the correct move was to do nothing.

"How do I teach something like that to subscribers?"

You don't, because every trade is different. You do learn it, from experience, from taking trade after trade and getting the feel for the game and everyone's feel is different.

"How the heck do I track results with that kind of trading, everyone exits at different times?"

"Forget your damn table, you already are tracking the best gain for every trade, it provides a measuring stick for what is possible. Leave it at that. By not telling your people when to exit, you give them the incentive to find their own exits, whether they want to use a hard stop, or a sliding stop like you are now, or no stop. Your trades are there, your entries are great, your stops are too rigid and they are hurting results."

"I have a lot of people who are new to trading options, they need some guidance on exiting busted trades, or taking profits before they disappear."

"I learned to trade by trial and error, by experience, by learning the game and most of all, by finding my own sense when it's time to get out. Your rules keep new traders from developing their skills, from finding their own way to make the system work for them. I've never followed a system as designed, sometimes did worse, but most of the time did better and every time I did better it was because I threw out the stops and exited the trades way earlier or way later than the system said. About the only hard and fast rule I ever used, and still do, is to never let a gain turn into a loss. Everything else is open."

"I wish my people were here to listen to your take on this. Mind if I write up your ideas and send it out to them?"

"Go ahead...but please don't use my name, I don't need anymore Google searches."

TRADING MODELS

In light of the discussion above, please make special note this weekend of the returns in columns labeled "Option Returns" which represents the application of our current stop strategy, and the far right "Max Option Percent" which represents the highest return the current trade has reached since entry.