Stops/Trailing Stops

[Anonymous]

Cam,

Huge fan, long time follower, recent subscriber, thanks for all your insights.

Question (not in hindsight, was thinking this at signal and have been thinking about this alot for my own trading)…

Why do “sell/sell signal” versus doing “tighten up (trailing) stops to x%”?

Thanks,
-Colin

[Cam Hui]

Sorry, I don’t understand the question.

[Anonymous]

Let me reformulate the question into a statement, which probably has issues, but which is what I am asking about:

#1 Say I buy into a position, which goes up
#2 My model later signals a (weak) sell
#3 I do _not_ sell at this point. Instead i tighten up my stops.
#4 if the position goes down as signaled, I am out quickly as intended
#5 If the signal was wrong, which happens quite often, i continue to ride the upside and I can reevaluate.

EG, Why ever sell outright? Instead just tighten stops and if you guessed wrong you stay in and profit.

[Cam Hui]

I understand now. Think about it this way:
1) If you sell your winning position immediately, you lock in the gain.
2) If you enter a stop loss, you are in effect buying a put option on your position. Regardless of how “cheap” the put option is because you tightened your stop, there is still a cost.

Either way, it will affect your P&L profile. You have to decide what is most appropriate for you.

[Anonymous]

Understood, thanks.

The reason I ask is that in the momentum modelling I have been doing, it seems significantly easier to find “good/clean” long entry points than it does finding, shall we say, “optimal” exit points, and so far I have been better off tightening stops and letting things run at exit points.

But, maybe that is just the nature of a bull market (and my modelling).

[Anonymous]

Understood, thanks.

The reason I ask is that in the momentum centric modelling I have been doing, it seems significantly easier to find “good/clean” long entrypoints than it does finding, shall we say, “optimal/accurate” exit points. So far I have been better off tightening stops and letting things run on sell signals.

But maybe that is the nature of bull markets (and my modelling).

[Author]

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