I think stop losses are bad for two reasons:
1. A stop loss is literally a pre-planned buy high, sell low.
2. You are throwing away your ability to make decisions.
In general, basing buy/sell decisions on only the current price is not rational trading. Whatever has happened to arrive at the current price cannot be changed or rectified by buying or selling. Buy and sell decisions should be based on the expected future price.
Topic: Is this a viable trading strategy? (Read 116 times)
These are probably already strategies or there are probably better versions of this somewhere already but this is what I came up with so I wanted to run it by you guys before I implement it. Please give feedback.
We will use LTC as an example in both strategies. Assume you have $5400 and LTC price is $270 so you can afford 20 LTC. We will ignore the small .3% fees on market orders as well. GDAX doesn't allow you to set a sell limit with a condition to cancel all other sell limits if one is filled. I wish it did.
Strategy 1
Buy 20 LTC at 270 each. You now have $0.
Stop loss of 5 at 260.
Stop loss of 5 at 265.
Limit sell 5 at 280.
OPTIONAL - Limit sell 5 at 290/Stop loss 5 at 250 or less
Some scenarios:
1) Price goes straight down to 260. You now have $2625 and are holding 10 LTC. You can either sell those 10 if you think it will go down further or re-buy the 10 you sold at $260 if you think it will rebound or you can hold your position.
2) Price goes straight up to 300. You sold 5 at 280 and are still holding 10-15 coins at $300. This is the ideal scenario.
3) Price hits your 280 sell and dips down and triggers both stop losses as well. You have $4025 + 5 LTC at average cost of 275. If this happens the other way around you would end up with the same thing but with the market on an uptrend instead.
4) Trigger first stop loss and first limit sell. You have $2725 + 10 LTC.
I know those were pretty redundant so I'll stop. But anyway, staggering the stop loss allows you to still have some coin in hand for a potential rebound between 260 and 265 instead of selling all 10 at 265 and the 280 limit sell allows you to lock in some profits.
Strategy 2
Buy 10 LTC at 270 each. You now have $2700 still in hand.
Limit buy 10 at 265
Limit sell 10 at 275
Scenarios:
1) Both limits trigger. You make $100 and are holding 10 LTC.
2) Price goes down and buy triggers and now you have 20 LTC going on a downtrend.
3) Price goes up and only the sell triggers and now you have 0 LTC going on an uptrend.
Strategy 2 Variant - Risk Mitigation
Buy 10 LTC at 270 each. You now have $2700 still in hand.
Limit buy 5 at 265
Stop loss 5 at 260
Limit sell 5 at 275
Scenarios:
1) Both limits trigger but not the stop loss. You now have $2750 and are holding 10 LTC. If the stop loss triggers after that, you end up with $4050 and holding only 5 LTC (at an average cost of $270) on a downtrend. Even if you manually sell those at $250 then you end up with $5300.
2) Price keeps going down and triggers your limit buy and stop loss. You now have $2675 and are holding 10 LTC on a downtrend.
3) Price goes up and only the sell triggers at 275 and now you have $4075 and 5 LTC going on an uptrend.
I understand that it would be much simpler to do just buy 20 coins and watch the market and if it goes up $5 then sell and make $100 but with the volatility here I feel like this is safer and allows you to walk away from the screen.
After typing all this out, it seems like Strategy 2 Risk Mitigation Variant seems to make the most sense. Worst that can happen is you lose $25 and end up holding 10 LTC.
We will use LTC as an example in both strategies. Assume you have $5400 and LTC price is $270 so you can afford 20 LTC. We will ignore the small .3% fees on market orders as well. GDAX doesn't allow you to set a sell limit with a condition to cancel all other sell limits if one is filled. I wish it did.
Strategy 1
Buy 20 LTC at 270 each. You now have $0.
Stop loss of 5 at 260.
Stop loss of 5 at 265.
Limit sell 5 at 280.
OPTIONAL - Limit sell 5 at 290/Stop loss 5 at 250 or less
Some scenarios:
1) Price goes straight down to 260. You now have $2625 and are holding 10 LTC. You can either sell those 10 if you think it will go down further or re-buy the 10 you sold at $260 if you think it will rebound or you can hold your position.
2) Price goes straight up to 300. You sold 5 at 280 and are still holding 10-15 coins at $300. This is the ideal scenario.
3) Price hits your 280 sell and dips down and triggers both stop losses as well. You have $4025 + 5 LTC at average cost of 275. If this happens the other way around you would end up with the same thing but with the market on an uptrend instead.
4) Trigger first stop loss and first limit sell. You have $2725 + 10 LTC.
I know those were pretty redundant so I'll stop. But anyway, staggering the stop loss allows you to still have some coin in hand for a potential rebound between 260 and 265 instead of selling all 10 at 265 and the 280 limit sell allows you to lock in some profits.
Strategy 2
Buy 10 LTC at 270 each. You now have $2700 still in hand.
Limit buy 10 at 265
Limit sell 10 at 275
Scenarios:
1) Both limits trigger. You make $100 and are holding 10 LTC.
2) Price goes down and buy triggers and now you have 20 LTC going on a downtrend.
3) Price goes up and only the sell triggers and now you have 0 LTC going on an uptrend.
Strategy 2 Variant - Risk Mitigation
Buy 10 LTC at 270 each. You now have $2700 still in hand.
Limit buy 5 at 265
Stop loss 5 at 260
Limit sell 5 at 275
Scenarios:
1) Both limits trigger but not the stop loss. You now have $2750 and are holding 10 LTC. If the stop loss triggers after that, you end up with $4050 and holding only 5 LTC (at an average cost of $270) on a downtrend. Even if you manually sell those at $250 then you end up with $5300.
2) Price keeps going down and triggers your limit buy and stop loss. You now have $2675 and are holding 10 LTC on a downtrend.
3) Price goes up and only the sell triggers at 275 and now you have $4075 and 5 LTC going on an uptrend.
I understand that it would be much simpler to do just buy 20 coins and watch the market and if it goes up $5 then sell and make $100 but with the volatility here I feel like this is safer and allows you to walk away from the screen.
After typing all this out, it seems like Strategy 2 Risk Mitigation Variant seems to make the most sense. Worst that can happen is you lose $25 and end up holding 10 LTC.
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