First, a stop order is used to manage risk - limits on
how much you can lose in a transaction. However, stop-loss orders can also
significantly increase the benefits when used properly as part of a set of
rules for trade. A simple example:
If every time you invest, if you know you have a 50% chance of 2% decrease per
unit before it goes up to 2%, and leaves the company (with a stop order of -2% and
a limit order 2%) if the event occurs, you should not have money in the long
run. 50% of profits will be -2% to 2% and 50%, cancel. One of the
most important rules for trade in the trade exchange, equity or foreign goods
is to limit your losses with stop loss orders and increase your profits are
possible. Never forget that.
Profit / Loss
Applying this rule, we are still 50% -2% of transactions reached its first, and
abandoned by the stop-loss orders are, but to achieve the 50% to 2% for the
first time, something will happenhigher. Of these, 50% the cause of the
positive momentum of the fall of the share stock price by another 5% (7% gain)
of 50% of the time, and 4% (-2% increase in 'stop loss order) of the other
50% of the time. The long-term average is now as follows:
Profit / Loss
As long as you do not take profits too early (typically agree not to accept a
lower margin than the loss which they were originally prepared), your average
gain is higher than the average loss, since the average increase gains
over the 2 +% can, but your average loss can not fall below 2%.
This method is more effective in high frequency trading, rather than long-term
investments (where it still be useful), because they place more trade and
converge to a long-term average. It also means that this strategy of risk
management, you can slowly build a single large profits, losses more numerous
but smaller, if your stop-loss order reaches outweigh occur. It is also
very useful in designing trading models, as they often rely on many small
losses is carefully managed and balanced by a few large gains.
I act in an investment banking and global FICC and traded my own account of
Australian equities in recent years. I outperformed the MSCI each year and
focus on global macro strategies and momentum.