2009-01-28

Taking A Stop Loss Correctly

Hello,

2007-04-25-aktienkurs,property=poster
I am still recovering from my shingles and it will take some more time, than I expected. I am not trading these days, which is really disappointing during a grand slam tournament.

However, I take the time to rethink about my first trades of the year. The most annoying trade for me was in the match Wozniacki v Dokic. I backed Wozniacki @1.32 during the 2nd set when score was 3-1 for Dokic. I expected odds on Wozniacki @1.45, if she loses the 2nd set, but the odds drifted to 1.75, when she lost the 2nd set 1-6.

The first major mistake I made was not defining a stop loss mark, when I backed Wozniacki. I agree with many other traders, you need to know your stop loss mark when you put on a trade. So the question is:
How to define your stop loss mark correctly?

My trading is based on the knowledge about odds moving. When I put on a trade I can not say who will win the match, but I can say if there is a value for me of odds movement, e.g. in certain situations I know the odds will move only a few ticks lower, but there is a high probability that the odds will raise. If I can identify such a situation I will put on a trade, because more often than not the odds will move in my favour and on a long term view the losses will be smaller than my winnings.

During the match Wozniacki v Dokic I had two (maybe more) options to define my stop loss mark:

  1. I take the loss, if Wozniacki loses the 2nd set.
  2. I take the loss, if the odds on Wozniacki drift to 1.46 (because that were the odds I expected on Wozniacki, if she loses the 2nd set).

Let’s do a little calculation:

  1. Back Wozniacki €50@1.32, Lay Wozniacki €37.71@1.75
    Total loss each way: –€12.28
  2. Back Wozniacki €50@1.32, Lay Wozniacki €45.20@1.46
    Total loss each way: –€4.80

The total loss in the first case is very much higher, than the total loss in the 2nd case. The question now is, which method is the better one?
The odds during a tennis match can move dramatically, even in a service game. If the score in a service game is 0*-30 I think my 1st stop loss mark would be reached and I had to take the stop loss, even if the score would turn to 2-3*.

Generally I have more winning trades, than losing trades, so if I can apply a rule, that I take a stop loss, when the total loss is equal to the total possible win.
For the match Wozniacki v Dokic it means:

Back Wozniacki €50@1.32:
Total possible profit: +€16.00
Stop loss market: –€16.00, which is equal to a lay Wozniacki €34@1.94

Generally there is no need to wait until this stop loss market is reached. I think it is more a maximum loss mark. If you can identify earlier, that your trade does not pay off, you do not have to wait for the stop loss mark, you can take the red earlier. In the match Wozniacki v Dokic I should have made it each way red, when Dokic won the 2nd set and odds on Wozniacki moved to 1.75, because I have the rule not to trade during a deciding set.

What’s the conclusion for me now?

  • I will define my stop loss mark before I put on a trade.
  • The maximum stop loss is equal to the possible profit of the trade.

Notice:
It is important to mention that the possible profit is not the profit you would gain, if would let the trade run as a bet. I will explain this:
Very often I back the favourite, if he loses the first set, but the stats are relative equal, e.g.:

Pre match odds: Player A: 1.52, Player B: 2.9
If player B wins the first set, the odds would be:
Player A: 3.00, Player B: 1.51.
I would close the trade, if player A wins the second set and odds would move to: Player A: 1.55, Player B: 2.80.
So the possible profit would be:
Lay Player B €37@1.51,
Lay Player A €36.04@1.55
Total profit: +€17.17
So the maximum loss is –€17.17 and not –€37.00, which is the possible profit, if you let the trade run as a bet.

I am not sure, if this method is the best method to take a stop loss, but I think this method is more adjusted to a specific trade, than a static stop loss mark like a number of ticks or a defined amount of money.

Would be nice to read some comments about this issue.

All the best and stay healthy!

Cheers, Loocie

8 comments:

amorphous said...

Hi Loocie,

Hope you are feeling a bit better.

As a rule of thumb, like you, I usually always get out before I reach the point where I stand to lose more than I could potentially gain....or when I am going to lose more than 20% of my stake money.

In tennis, I tend to keep faith with certain players beyond this point...Nadal, Federer, Murray and the Williams sisters spring to mind...as they all have the skill and the mentality to turn seemingly losing postions into winning ones very quickly.

For me, I guess it really depends on the match, the players involved and the size of stake.

Loocie said...

Hi Amorphous,

thanks for leaving a comment. Well, 20% of your staking money ist not very much. Even a 0-15 can touch odds, which let you take a stop loss, because you have an each way red on both sides. Maybe it depends also on the style of trading. I assume you are taking short positions when trading tennis matches, right?

Cheers, Loocie

Anthony said...

With tennis I'm a great advocate of getting out or in with half my original stake if it goes either slightly right or slightly wrong. If you're right, you leave half your money for the whole movement and if you're wrong you reduce your loss but still give yourself a chance to get out without a loss.
Anthony

Loocie said...

Hi Anthony,

thanks for dropping by.
What exactly do you mean with "slightly right or slighly wrong"? How many ticks are slightly?
I agree with you to take a stop loss with half of the original stake size, if it goes against you, but why do you want to get out, if the movement is in your favour? Don't you think you cut your winnings in that case?
Would be nice to hear from you.

Cheers, Loocie

Anthony said...

Hi Loocie,
When I say slightly right or wrong, I mean about 7-10 ticks or as much as I can get. I tend to try to get in the market by going against the server. If the server goes 0-30 down I consider this "slightly right" and will get out for half my stake. This almost certainly prevents me from making a loss on that trade. I then hope the server loses and I've then got half my stake to carry as far as the market goes - hopefully right over the flip-flop as it becomes much more valuable to use as a lay on the other player. I'm not too disciplined at it at the moment but I expect to get some big returns in the future. It just needs me to hang on and not grab the profit just because it's there.
Anthony

Loocie said...

Hi Anthony,

thanks for explaining your approach. Your strategy needs very much discipline, because more often than not, the server holds his serve.
Would be nice to read in the future how it works for you .

Cheers, Loocie

Anonymous said...

I think your stakes are too high.

You are basically a trader (like myself and many others), but you gotta lower your stake size. You have stake sizes that are worth 20-30% of your entire bank, and even if you trade out, that is hurting you by decreasing your bank by 10% or so. If you have a moving stake size (basically you set up your excel sheet to move inline with your stake) then you are putting yourself at more risk. Since consecutive losses would diminish your stake size and you are then cutting your winning edge. Say you made a trade on the assumption it loses more than it wins (even if its not an outright bet), but you (within very understandable standard deviation) lose the first 4-5 bets in a row. Your betting stake is lowered and your ability to capture that bet value (the value that is created over the LONG TERM of constantly REPEATING the trade) is removed because your stake size has dropped.


Anyway, I would suggest you try to read books like New Market Wizards, which interviews lots of professional traders, and a big thing is money management. Which I htink will help you a bit.

As for cutting losses and stuff...you just have to decide where that point is before you start, and if it hits..you gotta execute.

Good Luck.

Loocie said...

Hi Anonymous,

thanks for your detailed comment.
Actually I change my stake sizes only on a monthly basis, so I have the same stake size during a month. So within some negative trades in a row my stake size does not diminish. Only some losing months in a row will decrease my stake sizes, but if this happens I made too many mistakes when trading and then I have to rethink about what's going wrong.
Generally I agree with you to lower the percentages for the stake sizes depending on my trading bank.
Actually I am risking 20% of my bank during a trade and I would lose it, if Betfair crashes at the moment and none of my backup solutions (phone call or other betting exchange) will help me out. I will lower the percentages during the next months.
I will also have a look at some books about trading in general.
Thank you very much for your help.

Cheers, Loocie