Prediction based trading and irrelevance&irrationality of traditional Stop Loss

1. stock market,forex, commodity trading strategy of most kinds require use of stop loss to protect loss of capital beyond a point
2. Our prediction based strategy rarely uses a stop loss or seems not to use such an approach- opting to recommend use of buying options to limit losses. Is this irrational?
3. It can be argued use of “stop loss” as normally used implies possibility of unlimited loss since  limited losses on any number of trades will add up. Trader should be testing viability of each trading strategy rather than each trade- this is approach we take

Our Approach to Stop loss

4. 1.Our approach to stop loss is different because we believe that our prediction based  system uses better approach to trading being able to predict the “next” stage of market movement from any given point with high success rate.The deficiency our predictive system of not being able to predict the level from which market will fall or rise is countered by combining approximate timing of such event  and staggered buying in usually 2 stages.because we are on surer ground a surprisingly number of times that market will move in the predicted direction. Hence stop loss can prove counter productive

5. 2.But we use a superior “stop loss method “ –a different stop loss approach. If any prediction method is good it should give profits over a large statistical sample of trades executed using that method .Hence our approach is to ask trader to invest capital K, execute atleast 10-30 trades and at the end of it be willing to loose/risk fixed predetermined percentage of invested capital. When that pre stated capital is lost, it is failed trading strategy and trader has lost only the amount of capital which he had predetermined as his “exit” “tolerance limit”.so instead of keeping stop loss per trade we keep stop loss on “trading capital”   This is better trading  than keeping stop losses on each trade but none on overall losses

6. Stop loss method is sharpened by trading in options less or no  futures ,using fewer stop losses, making safer prediction based trades to build “buffer capital”

7. This is not theoretical but also based on actual situations when market gives a great profit after stop loss has been triggered because premiums on options can behave strangely leading to “stop loss” being triggered

8. Of course if a reasonable profit has been made, it is vital to keep stop losses to protect and maximize profits on each trade

9. Hence in our prediction based trades it is important to keep Stop loss on trading capital being “invested” but rarely on each trade

        

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