Alternative Risk Management Strategies (Taboo!)Professional and highly experienced traders who choose to trade without traditional stop-loss orders often adopt alternative risk management strategies that offer a ton of advantages. While this approach may not be suitable for all of you, it can be beneficial for those who have developed strong risk management skills and are capable of effectively managing their positions. I have been trading with a non-mainstream approach for over 10 years and would never, ever... ever go back to using traditional stop losses. My net gains generation did not start moving in the right direction until I made the change. Here are my thoughts, but take note that there ARE emergency stops placed at the portfolio level at key thresholds regardless of individual asset management plans.
1️⃣ Flexibility in Position Sizing: Without a fixed stop-loss level, I have the flexibility to adjust my position sizes based on market conditions and their risk tolerance. This allows me to take advantage of favorable opportunities while limiting exposure during uncertain or volatile periods. Trading small positions within a single trade is the secret to scaling in.
2️⃣ Avoiding Stop Runs: I may prefer not to use traditional stop-loss orders to avoid getting stopped out during short-term market fluctuations or stop runs by large institutional players. By relying on your own risk management techniques, you can maintain control over your positions, especially if you have a well crafted plan to work out of the trade in the event that you are wrong.
3️⃣ Reducing Order Book Impact: Placing visible stop-loss orders can sometimes lead to order book impact, causing market movements that trigger these stops. I may choose alternative risk management methods to avoid contributing to such market moves and getting constantly stopped out regardless of a solid trade idea.
4️⃣ Long-Term Trading Perspective: I often adopt alternative risk management to take a more long-term view of my positions. I have a higher tolerance for short-term drawdowns because I believe in the long-term potential of my trades and I trust my ability to exit them. Having said that, I stick to my drawdown thresholds, which are part of my business plan. My entire portfolio rebalancing actions revolve around managing drawdown. So after trading small relative to equity, this is rule number 2.
5️⃣ Dynamic Risk Management: I can use dynamic risk management techniques, such as trailing stops or scaling out of positions, to protect profits and manage risk effectively. I place trailing in the money stops, take gains prior to target if needed when I spot something fishy and I can reload if I get a price improvement. Every trade... every position within a trade is treated individually too, with its own set of circumstances and conditions.
6️⃣ Selective Stop Placement: Rather than relying on fixed stop-loss levels, I may use critical support/resistance levels, technical indicators or simple sentiment bias to determine exit points, allowing for more selective and informed decisions.
7️⃣ Hedging and Damage Control Strategies: Advanced traders might employ hedging or options strategies to protect against adverse market movements, providing an alternative risk management approach. I use a methodology we call Damage Control, which allows for advanced management of positions and the portfolio as a whole using simple hedging, portfolio level hedging and rebalancing, advanced intra/inter asset hedging, net gains washing and much, much more.
Trading without stops requires a deep understanding of risk management and a disciplined trading approach. It is a controversial subject on #fintwit (or is it #finX now) because the mainstream influencers preach stops as if they were the only way to trade. In my case, stop trading at the beginning of my career was the right thing to do as I was learning, but ended up being an impediment rather than an advantage and after having honed my skills over years of experience, I found alternative risk management strategies and a comprehensive business/trading plan the way to success. 10 years of it. 💡
