INTRADAY TRADING: Small stop chop versus big stop drawdowns

[candletrader]

Seasoned and consistent traders have long given up any proverbial search for the 'Holy Grail' of technical set-ups, and have come to the realization that risk management can potentially transform any marginally positive expectancy approach into something potentially special...

The two schools of thought, whatever the timeframe, are:
1) to use small stops and potentially be chopped around until you get a clear winner... somewhat psychologically damaging, some would argue... OR
2) to use large stops to give the thing room to wiggle into a clear winner... but suffer potentially large drawdowns on a string of losers... somewhat psychologically damaging, some would argue...

So which sort of trader are you? 1 or 2 or some kind of hybrid? What do you do specifically and why?

State your experiences and outline appropriate analysis as you see fit...

 

[gnome]

Quote from candletrader:

Seasoned and consistent traders have long given up any proverbial search for the 'Holy Grail' of technical set-ups, and have come to the realization that risk management can potentially transform any marginally positive expectancy approach into something potentially special...

The two schools of thought, whatever the timeframe, are:
1) to use small stops and potentially be chopped around until you get a clear winner... somewhat psychologically damaging, some would argue... OR
2) to use large stops to give the thing room to wiggle into a clear winner... but suffer potentially large drawdowns on a string of losers... somewhat psychologically damaging, some would argue...

So which sort of trader are you? 1 or 2 or some kind of hybrid? What do you do specifically and why?

State your experiences and outline appropriate analysis as you see fit...

Hey Candle...

You've hit the nail on the head and described what most traders are loathe to accept..... namely, "stops are arbitrary". Tight is good sometimes; loose is good sometimes. There is no correct answer.

A partial solution is to play "bigger setups".

 

[Truff]

Quote from candletrader:

Seasoned and consistent traders have long given up any proverbial search for the 'Holy Grail' of technical set-ups, and have come to the realization that risk management can potentially transform any marginally positive expectancy approach into something potentially special...

The two schools of thought, whatever the timeframe, are:
1) to use small stops and potentially be chopped around until you get a clear winner... somewhat psychologically damaging, some would argue... OR
2) to use large stops to give the thing room to wiggle into a clear winner... but suffer potentially large drawdowns on a string of losers... somewhat psychologically damaging, some would argue...

So which sort of trader are you? 1 or 2 or some kind of hybrid? What do you do specifically and why?

State your experiences and outline appropriate analysis as you see fit...

I used to be trader 1, now i am trader 2. I set catostrophic stops to begin and tighten them as or if my signals weaken. This ensures i stay in good trades. The $ i make staying in longer far outways the once in a while large stop out.

 

[easyrider]

Id never watch a trade go more than a few ticks against me. Never, never, never..........................You can always get back in.

 

[PitchBlack]

Quote from easyrider:

Id never watch a trade go more than a few ticks against me. Never, never, never..........................You can always get back in.

That's the only way to survive in the long run .

And if you get stopped too many times you should work on your entry and exit system not on your stop system.

People abuse stops or don't use them at all.

Your system should give the good entry and exit points; that's the purpose of a good system.
The stops are used as a prevention against losses if the system fails. But a failure is only an abnormal event that occurred, in normal trading the system should be able to absorb a small loss.

 

[NihabaAshi]

Quote from candletrader:

Seasoned and consistent traders have long given up any proverbial search for the 'Holy Grail' of technical set-ups, and have come to the realization that risk management can potentially transform any marginally positive expectancy approach into something potentially special...

The two schools of thought, whatever the timeframe, are:
1) to use small stops and potentially be chopped around until you get a clear winner... somewhat psychologically damaging, some would argue... OR
2) to use large stops to give the thing room to wiggle into a clear winner... but suffer potentially large drawdowns on a string of losers... somewhat psychologically damaging, some would argue...

So which sort of trader are you? 1 or 2 or some kind of hybrid? What do you do specifically and why?

State your experiences and outline appropriate analysis as you see fit...

Hi candlestrader,

I discuss this often at EliteTrader.com

First of all, I don't recommend using any fixed stop because the same stop regardless if its small or big...

Assumes that the price action each trading day is the same.

Thus, the stop should be based upon current price action at the time of the trade.

Thus, when there's a problem with small stops or wide stops...

That means there's a problem with analyzing the price action.

Now...when stops being hit becomes a big stop drawdowns usually implies that's a trader that's ignoring trade signals to either close his/her position or reverse the position after entry.

There was a few journals here at ET that symbolized the above...

Traders ignoring trade signals that appear after their entry.

Example...lets say you get a Long signal and you take the trade at 10am est...

Regardless if your profitable or not by 1015am est...your wide stop hasn't been hit.

Then a Short signal from your trade methodology appears...

Most traders will not react to that Short signal and will stay married to their Long position.

Now...if big stop drawdowns are consistent...

It's not a stop problem...its an entry signal problem.

NihabaAshi

 

[bali_survivor]

Quote from candletrader:



State your experiences and outline appropriate analysis as you see fit...

No "trading" stop - we get out on a suitable location once we determine that the trend that we are trading has reversed on us.
(If you rely on a stop then something is wrong with determining YOUR trend)

We do have a "crash" strategy.

Cannot outline in detail what we are doing, am not going to let the cat out of the bag.

Maria (daughter of bali_survivor)

 

[Thunderdog]

Personally, I favor tight stops. In any event, the size of my stop is a function of the preceding volatility. Only when I have a particularly good setup do I very slightly increase the size of the protective stop by a tick or two. However, choppy price action seldom yields particularly good setups in my opinion. Therefore, when a setup does present itself, my stop will be fairly tight. The idea of giving wider berth to crummy price action is as counterintuitive to me as, say, trusting a less reliable person with more of your money.

This is just my personal assessment based on my own method. I would think that the appropriate stop size is ultimately a function of the reliability and characteristics of the trading method in question. Comparing relative stop sizes for completely different trading methods may be misleading.

 

[Maverick1]

Quote from Thunderdog:

This is just my personal assessment based on my own method. I would think that the appropriate stop size is ultimately a function of the reliability and characteristics of the trading method in question. Comparing relative stop sizes for completely different trading methods may be misleading. [/B]

Agreed. Why not have at least 2 methods to weather the change in intraday behavior, and trade them simultaneously? One with a larger stop and larger profit targets and one with a shorter stop and quicker profit targets?

I guess one could say that would be hard to do all at once...

 

[candletrader]

Quote from Thunderdog:

Personally, I favor tight stops. In any event, the size of my stop is a function of the preceding volatility. Only when I have a particularly good setup do I very slightly increase the size of the protective stop by a tick or two. However, choppy price action seldom yields particularly good setups in my opinion. Therefore, when a setup does present itself, my stop will be fairly tight. The idea of giving wider berth to crummy price action is as counterintuitive to me as, say, trusting a less reliable person with more of your money.

This is just my personal assessment based on my own method. I would think that the appropriate stop size is ultimately a function of the reliability and characteristics of the trading method in question. Comparing relative stop sizes for completely different trading methods may be misleading.

Have you backtested for any opportunity cost of this zero tolerance approach to stops i.e. is there a net overall loss in profit relative to if you had used larger stops?