“Dumbest concept I’ve ever heard.”
Larry Connors' Trading Lesson of The Day | September 10, 2024
Yesterday we began the process of looking at stops with billionaire hedge fund manager Stanley Druckenmiller saying “I’ve been in business since 1976 as a money manager, I’ve never used a stop loss. Dumbest concept I’ve ever heard”.
How could this be? How could a self-made billionaire trader and fund manager, with audited results and who put in decades of annual double-digit performance with no down years, do so without using stops? And on top of that, saying they’re the dumbest concept he’s ever heard of?
Well, there’s a lot of wisdom to this. In spite of what the many “self-described” gurus on X (formerly known as Twitter) want to tell you, the fact is that it’s not as black and white as they’d have you believe.
As we look at this, let’s cover a few points:
1. I’m not telling you not to use stops. If they’ve been successful for you, there’s no need to change.
2. Stops, in my opinion, play a larger role in intra-day trading than in overnight trading. They can be applied multiple ways not only for defensive (protective) purposes, they can also be used for offensive purposes.
3. I’ve stated this for many years and having coached numerous hedge fund managers, floor traders, and traders from large asset management firms, along with thousands of higher level individual professional traders, they all know this from personal experience…STOPS DO ABSOLUTELY NOTHING TO PROTECT YOUR CAPITAL THE MAJORITY OF THE TIME!!!
This is simple logic. The US equity markets are open for regular trading 6 ½ hours a day, 5 days a week. That comes down to 32 ½ hours per week.
There are 168 hours in a week. That means there is no protection in place over 80% of the time when the market is closed!
Somehow, some way, this simple reality has been lost in the minds of many.
Therefore, those who state they’re “always protected” with stops are either delusional or they really don’t trade. The majority of time they have no protection.
This means no overnight protection, nor any protection over the weekend.
Most of the time that’s fine. But all it takes is one major event, either on a market basis, or an individual stock basis and everything changes.
Having traded through the Black Monday in October 1987 (the opening gaps down were horrendous), 9/11 where the market was closed for days and then reopened the following Monday with the majority of stocks seeing massive opening print losses, the closing of Lehman in September 2008, and many dozens of stocks who missed earnings after the close, or announced blind-siding events (again after the market close) and seeing their stock get crushed on the opening, you can now begin to understand Druckenmiller’s philosophy of why he doesn’t use stops.
Tomorrow, I’ll share with you large sample size data to support this even further. From data comes wisdom.
Then we’ll go into solution mode. We’ll look at alternatives, and in most cases better ways to protect your trades in order to reach your goal of achieving consistent returns with your trading.
I’ll see you tomorrow!
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