Transparency on stop loss

I’m currently in AI TQQQ SQQQ.

When a trade is entered, I’m assuming the stop loss is held at C2? Or does only the algo signal the exit condition?

If the algorithm fails to transmit the exit signal or C2 fails to send the exit, then we have a potentially “falling knife” scenario.

With brokers like Interactive Brokers along with auto trade, wouldn’t it make the most sense to enter the market order bracketed with a worst case scenario stop loss attached to that order? To mitigate the aforementioned exit risks?

Have you fielded this question directly to the trade leader?

Hi JimJones2, great questions.

The stop loss isn’t held at C2, it’s not “held”, the sell is done by the AI robot (the “or” in your post). I would use quotes around “stop loss” as it’s just a term used to describe the purpose of the sell (sell in case things don’t go as expected). As for the risk you describe of signals not going through in the chain (failure to transmit that you mention), that actually applies to all orders, not just stops. Say the system determines today is a short, but that fails to transmit, then system can remain long.

C2 has a built in system to set your own stop losses for strategies one follow’s, it’s purpose can be for what you describe (to protect against a fail to transmit). Another option maybe to set stop loss order at IB itself (since that has fewest failure points).

In general, even with stop at IB itself (most direct), there’s risks. It’s one of the risks of trading electronically, and something to consider. My recommendation is no backup stop on one’s own IB account, and no backup stop on C2. I feel the tradeoff is worth the gain (tradeoff being risk of failed transmittal of a signal (this is very low probability), versus properly following a system that one is subscribed to (if you assume system has positive alpha, deviating from system usually reduces that alpha)).

One could set the “safety” stop loss to something like 10% or 15%, this should reduce risk of deviating from system (since with AI TQQQ SQQQ swing, historically, the AI would sell before a drop of that much). This way the safety stop loss would get hit only in case of failed signal transmission.
- Tony


Want to add, a stop loss won’t protect against overnight gap downs. A gap down can be like 50% 80%. This risk is higher with individual stocks, but still there with TQQQ especially since it’s leveraged. My way of thinking is, accept the risk of a 90%+ loss (black swan event), and control for this risk. One should NEVER have 100% of their portfolios in AI TQQQ SQQQ swing (this applies in general most of the time to any stock, system, etc).

If I have say $100k to invest and only have it in AI TQQQ SQQQ swing, how I would do it is maybe 60% in AI TQQQ SQQQ swing, and 40% in intermediate bonds (like VGIT). Rebalance quarterly. Worst case of a 90%+ loss in TQQQ, at next rebalance point you are back in (assuming TQQQ still exists, meaning not 100% loss, but like 90%+).

It seems highly unlikely this will happen with TQQQ but who knows! It happened to XIV (I lived through that and was invested in that at the time, luckily stopped out day before the big drop).

          - Tony

The 20% circuit breaker will probably prevent the fate of TQQQ heading to zero. (“probably” :smile: )

The ~ 28% gap down for TQQQ back in March 2020, would have been brutal. But there had been several large gap downs prior, seemingly enough time for AI TQQQ SQQQ swing to be on the short side. (“seemingly” :smile: )

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