How to lose little

Trading is not:
  • just have a lot of winners
  • cut losses
  • buy low and sell high
  • have enough capital
  • etc...
We had a long time ago a big discussion on ET about entries and exits.
Many people said just enter random and manage the trade.
Others said: entry is not important, exit is.
Others (like me) said that a very good entry is important and decisive for the trade.
The question is: on what is that opinion based?
Many people never really (or wrongly) studied that and based their opinion just on their feelings or intuition.

I will show why for me the entries are very important and decisive for a good result. I just took some random parameters to show the mecanism. These parameters are not based on any real trading. The parameters can be taken from the expectancy of your system.


I made a simulation with the following elements:
  • capital $1,000
  • net profit per day 5 points
  • max risk 10%
  • compounding till 100 contracts ES
  • start with MES and switch to ES when capital is above $5,000
  • test period 3 months
I made five different simulations:
  • 5 points stop
  • 6 points stop
  • 7 points stop
  • 8 points stop
  • 9 points stop
  • 10 points stop
As the risk should always be max 10%, rising the stop would implicate that the margin ( because of the wider stops) would go up, so trading less contracts.

In the chart you see the result in capital after 3 months of trading. Almost nobody has any idea how big the differences are. A 5 points stop results in ending capital $378,517 while the 10 points stop results in $19,704. Both have the same risk. It is clear that entering later with more certainty, as there will be less risk of an opposite move triggering the stop, is much better than trying to catch tops or bottoms. The fact that you can trade with 5 points stops is mainly because you wait long enough to let the trend develop. The clearer the trend, the lesser the risk of an opposite move. You will miss maybe 1-2 points, but that is largely compensated by the bigger size you can trade due to the higher leverage. I am sure that over 90% of ET never did this simulation.

Conclusion: it is essential to use something that can help you to define the trend with high reliability.

sim.jpg
 
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Focus on how to lose little avoids the real question, which is how to win more than you lose in trading. Both objectives of controlling losses and ensuring wins need attention and a failure to manage either will result in failure in trading.
 
It is a very interesting study, I will try to use small stops, I had never thought that there would be so much difference.
Thank you very much to all
 
traider said:
If you have a stop loss that actually works well, it is actually a signal to sell. Might as well just use that as an entry signal instead.
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I don't agree.
If your stop is hit there can be several possibilities:
  • your stop can be too close
  • your stop can be far enough, but because of high volatility you got accidentally stopped
  • your trade is wrong
If your trade is stopped out, you have different options:
  • just get out
  • reverse your position
  • wait and go the other way on a better price
  • wait and take the same direction at a better entry price
Being stopped out does not mean that you automatically have to take the other direction. I would never use a "stop and reverse" automatically because you never know how the situation is at the moment that you get stopped. In a high volatile market you might get whipsawed by using "stop and reverse".
 
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trader1974 said:
It is a very interesting study, I will try to use small stops, I had never thought that there would be so much difference.
Thank you very much to all
More...

No, you should first build a trading system and see if the system wants close stops or not. So you should experiment yourself with your trading system and try to find out what is optimal for your trading system.

You should not ask that question here as nobody knows how your system is functioning or what it needs. Some people have wider stops, and some have small stops. And they both can be right. Depends on their trading system.
 
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