Equity Stops
--
I recently did a poll on twitter and asked my subscribers not to participate as it might skew the results.
For many reasons equity is hands down the most important aspect in trading. My subscribers know this. And my students who read my Medium articles but are not subscribers also know this.
Only 75% of the respondents got this wrong. Frankly, I was expecting 90% wrong so I suspect the many non-subscribers familiar with my work participated.
I did get one worthy reply worth sharing.
First, stops are generally placed at “magic points.” Below lows or above highs, tend to congregate, and are easily tripped by short-term manipulation. A much better method for stop-loss placement is simply to risk a portion of equity, rather than a magic point on a chart.
Second, risk-reward is a widely held subjective myth. While risk can be measured objectively due to equity, the reward cannot be measured. Risk can be defined and has meaning. Risk/rewards may sound good but is a meaningless concept.
Third, due to new market innovations developed on unregulated exchanges, in particular, Arthur Hayes and Bitmex, stop-loss orders are outdated. Socialized losses and insurance funds have provided a better alternative.
Fourth, since the only objective measure is your personal equity, stops should reflect your equity not “magic points”. In modern derivative markets, limiting your equity also limits exchange risk exposure and preservation of capital in equity downturns.
Fifth, by using equity stops flash spike liquidations running through stops are avoided. A…
