3:1
- Thread starter acrary
- Start date
Hey Fast,
I to Trade ES and typically set my initial stop equal to my profit target (I am usually going for about 2 to 4 pts). My stop rarely gets hit because if the trade is not acting properly, I exit for a small loss before my stop is hit. I use profit targets but am trying to find a way to maximize my winners because I often seem to be leaving money on the table.
I get in when the market tells me an out when the market tells me. Waiting for the market to give you an exact amount can be very risky.
The way I look at it is, if the risk is two points (reasonable in ES), the there should be no major reason why the trade cannot reach 6 points. If there is resistance at 3 points, the odds are not good enough, and you should pass on the trade.
In reality, RR ratios are tough to quantify in real-time. No-one knows how well a trade works out, so it's always a guess.
Im in a good mood tonight Wareco. I am going to agree with you 100% its total unrealistic. There is no way your are going to make 6 points on half your trades without at least the understanding beforehand that this range is going to require that you learn how to hold futures overnight.
So lets be more realistic: Lets say a 2.5:1 ratio on an absolute amount of points such as:
1.5 point stop loss and a 3.75 point gain on the ES. Furthermore the ratio will have to be even more condensed by assuming that to have this strategy work you have to take more than 1 contract lets say you trade 5 ES at a time. Then to make it even more realistic. Once you are up 1.5 ES points on a trade of 5 lot ES you take off 2 ES no questions asked. Then you move the stop on the ES up to .5 under your cost and let the rest ride to the final gain no matter what or stop out on the final 3 ES at .5 loss on the remaining. Now that would be much more realistic: lets see where that brings us too with an example:
Lets say because your looking for a gain of 3.75 points with a 1.5 point stop on the ES and your utilizing 5 ES contracts per trading opportunity you will probably find about 30 choice opportunities per month if your dilligent.
Then with that being understood lets do the math and assume once again a 50/50 win/loss ratio.
Lets say scenario one is a pure basis where you are either only stopped out or only reach target. That would mean that a winning trade would work out as follows on a 5 lot: 2 ES sold for 3 ES point gain the remaining 3=sold for Total gain of 11.25 point gain. For an absolute total number of points = to 14.25
Now the losing side of the equation is a bit more tricky due to more variables so lets make an assumption using averages. Scenario #1, 50% of the time the trade will never even go 1.5 points profitable in your favor and you will get stopped out on 5 contracts at a 1.5 point stop loss for a total loss in ES points of 7.5 The other 50% of the time you will get out of the ES on 2 contracts when its 1.5 points up in your favor for a total gain of 3 points but the remaing 3 contracts will fall back and cause you moved up to the stop loss your out on your newly moved up stopped loss for a .5 stop and a total loss of 1.5 points. That comes out to actually making a net of +1.5 ES points on this loss scneario # 2. Now loss scenario # 1 and loss scenario # 2 need to be averaged together as on a purely radom basis if you go in to an ES trade without even an edge 50% of the time you will be up 1.5 points and the other 50% of the time you will be down 1.5 thats the beauty of this method. With that stated the total loss side of the equation will now be .5(-7.5)+.5(1.5)= -3 ES points loss on average utilzing 5 contracts on each trading opportunity.
Now with have the win and loss side of the equation lets add of the figures:
30 trading opportunities: win loss ratio of 50%. Each trading opp we trade with 5 ES contracts. Now the reward/risk ratio becomes 14.25/3= 4.75 not bad.
In terms of money 15 times when we win we make 14.25 total points at 50 bucks per point that is = $10,687.50
The other 15 times when we loss we loss on average 3 total points at 50 bucks per point that is = $2,250.00
Total Gross gain now = $8,437.00
Net gain with commisions on total contracts traded assuming 2.4 per contract would be $7,717.00 net gain per month on this strategy.
This strategy also has a better than average chance than the first one I mentioned to be able to only be traded during the day as it takes in to account the average true range of the ES. Furthermore, more trading opportunites will show up because your looking for a lower range of points. Lastly, this method takes in to account the realism of taking some of the money off the table when your up and moving a stop loss up to near breakeven when your trade is in the green. Thanks again
Setting fixed ratios of risk to reward seems plausible but the implementation can give undesired results. For instance, if you are using a 2 pt stop and a 6 pt target with the ES and the market moves 4 or 5 points in your favor before reversing, you've just turned a good profit into a break even unless you also use some way to trail your stop. This will also lower your win percent since it is easier for the market to reach your stop than your target.
And, you will limit yourself from capturing much larger moves on trend days or trend afternoons.
This is why I believe the entry is the MOST IMPORTANT aspect of the trade. If your entry isn't good, market noise will often get your stop even on some of your good trades unless you use very wide stops. Then, with wide stops, the wider the stop the more you must get to average your 3:1 win/loss ratio.
So, I believe one must first select an entry point that 1) has a low probability of getting your initial stop hit and 2) has enough room to allow for a possible large win if the trade works.
And, the only way to keep winners from turning into losers yet not limiting your profit potential on a trade is to use trailing stops (manually under reaction lows or an automatic fixed point from the extreme move so far) OR use some type of method that tells you the move is over OR both. (Hint, often volume spikes portend end of moves except in the stronger trends).
I would like to see some of the seasoned pro traders of the ES comment on this as I too struggle with these concepts daily.
And, you will limit yourself from capturing much larger moves on trend days or trend afternoons.
This is why I believe the entry is the MOST IMPORTANT aspect of the trade. If your entry isn't good, market noise will often get your stop even on some of your good trades unless you use very wide stops. Then, with wide stops, the wider the stop the more you must get to average your 3:1 win/loss ratio.
So, I believe one must first select an entry point that 1) has a low probability of getting your initial stop hit and 2) has enough room to allow for a possible large win if the trade works.
And, the only way to keep winners from turning into losers yet not limiting your profit potential on a trade is to use trailing stops (manually under reaction lows or an automatic fixed point from the extreme move so far) OR use some type of method that tells you the move is over OR both. (Hint, often volume spikes portend end of moves except in the stronger trends).
I would like to see some of the seasoned pro traders of the ES comment on this as I too struggle with these concepts daily.
