Quote from sle:
Out of curiosity, why would you deliberately design a strategy to have negatively skewed return distribution, even if the mean is positive?
It actually was not deliberate. This "system" is based on the entry and initial stop movement logic of a broader intraday system. I've separated the "entry and initial stop movement" component of that trade from the "intraday swing" component. I found that for many values of my model parameters, the "intraday swing" component of the trade was unprofitable, but those trades did actually traverse the distance from my initial entry price to the initial stop movement price. Thus, I reasoned that while those trades were not suitable as intraday swing, they were suitable as trades to "scalp" the distance between the entry price and the stop movement price.
Let's say price action says enter the ES long at 1400 and the price at which I can move my initial stop is 1403. I am now looking at "how" price moves from 1400 to 1403 and determining if it is worth holding the trade or not. The odds of price making it from 1400 to 1403, under certain parameter values, are extremely high, but the odds of the trade then going on to be closed out above 1400 are low. So, I would find myself in a situation where I would enter at 1400 with an initial stop at, e.g. 1385, and then the ES would reach 1403 and I could raise my stop to, e.g. 1398, but then the ES would fall back to 1398 stopping me out with a 2 point loss overall. In this new scenario, I would enter at 1400, exit at 1403 and re-enter at 1403.25 if that additional parameter value were such that it favored the trade ultimately concluding at a price greater than 1400. This is based on the hypothesis that the way in which price moves from 1400 to 1403 can provide clues on whether price will continue in my direction beyond 1403 in such a way as to make the likelihood of price moving in such a way as to enable me to manage the trade to a close higher than 1400 higher.
Basically, there is a "good" way for price to move from 1400 to 1403 and a "bad" way for price to move from 1400 to 1403. Overall, the likelihood of price moving from 1400 to 1403 is that 90%+ rate that I mentioned at the start of the thread. But, since the initial stop set at the entry at 1400 is often quite distant, when it does get hit, it leads to that skewed ratio. There is also a "good" way for price to reach 1400 in the first place, but even when price reaches 1400 in the "bad" way, it is still very likely to reach 1403. It just isn't likely to continue on in such a way as to end above 1400, at least not the way I manage a trade.
One of the primary benefits of this is that trades I would have completely passed on due to the lower likelihood of them ending profitably under the "intraday swing" system can be entered and exited for a small profit under the "entry and initial stop movement" system because even those trades for which I have a good idea that they won't end up profitable as "swing trades" will usually at least hit that initial stop movement price. So, instead of completely passing on the trade and avoiding a loss, I take the trade but exit at the initial stop movement price. I still avoid the loss (most times) but I gain a little on the trade.
Hope that makes sense. At least, it makes sense so that you understand what I'm trying to do, even if you disagree with me trying to do it.
