Does a stop-loss save your bacon - or fry it?

Have you used the stop-loss feature, e.g. in Bet Angel Professional and others, and found that rapid and short-lived shifts in the market trigger your stop-loss only to then see the market move strongly in the direction you expected?

This means you end up with your worst-case loss and also miss-out on the profit of the trade you planned. Double doh. Unfortunately I couldn't collect the stats to see if it is true, but I have the strong feeling that I have lost far far more money on stop-losses than they have saved me from potentially losing with trades that went against me (not because I have some fortune-telling ability of which way the market is going to move, but because of the "double-doh" effect).

I am trying to construct a strategy for my trading before I restart next week so that I can measure my results with consistency. The idea is that if I have an average profit higher than my average loss and a strike rate of 50% or better, then I'll make money in the long-run. To be able to predefine the risk of any trade I ideally need an automatic stop-loss. Safe in that knowledge I would then be able to accept the inevitable losses when they come as a hazard of the job. That's the theory anyhow, if I feel that some red-brace wearing yuppie has just ransacked my trading strategy with his "misguided" £10k wager against the market trend then I might just have to take revenge and show him the error of his ways. This is usually the point where I blow my whole bank and put my last £2 on the 100-1 outsider in the last. Hence me trying to look at things in a more structured way......

What do you think is going on here? When using fast refreshing on BAP such as 200ms, I occasionally notice bets entered that move the market down as much as 7+ ticks and then the market surges in the opposite direction. Now I'm guessing that anyone with enough account balance to do this isn't a complete muppet.

Obviously this can only happen in a fairly weak market - or more to the point one that is exceptionally weak at that moment in time. I'm wondering if there are bots monitoring this. The large swing in one direction would trigger any stop-losses that traders have - presumably at the point where their exit-trades are significantly larger than the amounts taken to swing the market. The "non-muppet" then puts in a counter-order to match all those lovely stop-losses at a much improved average price and then the market goes on its merry way for them to eat out at the Ritz every day.

Maybe this isn't the reason for these sharp spikes in the market, but it's the one I came up with (no, I don't like the X-Files!), do you have any others?

Perhaps the more important question is actually how to have an effective stop-loss strategy. Of course the more common scenario than what I have mentioned above is that major moves in the market can be preceded by an initial sharp move. This is another problem for stop-loss though as it is processed by the software on the trader's computer and not on the Betfair server. I'm sure I'm not alone in that I've also had my stop-loss unmatched because the market has moved too quickly through it, which then leaves the unpleasant task of scrambling to exit a trade with all the other red-faced traders.

I'm wondering if it is best to set "mental" stop-loss limits before trades and then place them manually when needed. I suppose it comes back to whether you can trust yourself to do the right thing...............

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