Quote from Girlpower:
I have a simple method for this.
I work with fairly tight stops. I look at the trade as it is presenting, where my stop would be etc. Then look to place the order where my stop would be (providing that my new stop level is far enough away to hold). This is based upon small stops almost always get taken out, so that is the place to get in. If the new stop level is still likely to get taken out or tested close to it, then move the price level for entry down a bit more and the stop with it until the best balance is found. That way I am getting close to optimal entry price and a better profit potnetial from the move.
I might miss 1 or 2 trades that way, but overall it's worth missing an entry point or two because it's just a touch further than the market does go back, and anyway there's always another good entry point just around the corner...
Best
Natalie
LOL! Excellent, Natalie! Now this
really is a tactic - And it's a pretty ingenious trading secret revealed...
I do exactly the same thing. People always ask me how I can use such small stops on the futs.
I tell them I just subtract the average "fake-range" of the issue.
Basically, like the discount I was talking about, the big boys want to have a good 'discount', too (they almost only trade on discounts as a matter of fact). So whenever people see an entry, they put in like 3-point stops in order to protect themselves from the adverse price-excursions of discount/stop - hounding pro's. Why?
It's like: How can people assume that they can get into the market at current price and still turn a profit when 100,000 other people are seeing the same obvious thing? If it's not the pro's doing size themselves, it's the market that will always be trying to get a discount to shake out the majority of people before continuing wherever it needs to go / the smart money wants it to go.
Essentially, "the market", or more clearly the sum of it's smart money participants tends to continue only when the largest number of participants has been shaken out and the smallest number of participants is still holding on, to take money off the largest part of participants. This is a fundamental requirement in any zero-sum game.
I.e. now the majority of people are convinced that price is going to continue down, the ask is fat with dumb money bears, and the smart money bulls are looking at a great feast of bear-meat, giving them huge buying momentum. This is often graphically reflected by the pullbacks or dips that occur before a large breakout.
A lot of people just don't understand this. They think "go with the flow" and "heavy ask means more sellers and price will go down".
They'll all be fried bear-meat sooner or later.
The reverse applies for a downmove, of course.
It's like the Titanic : There weren't enough vessels to get everybody in. They had to hit the swimmers trying to get in the boats on the heads with paddles to keep their own boats from sinking. Hardly anybody talks about this today because it seems so cruel. However, the market does exactly the same thing everyday. The 'ships' in the market are trends / moves and they keep travelling, hitting icebergs and sinking, all day long.
If you use flaw cards and logs like Jack Hershey teaches, you can even identify these "icebergs" before all the others do and sneak off the ship long before panic breaks out.
So, as a conclusion of all this, we'll have to almost assume that small stops WILL get taken out via stop-hounding, so why not subtract that from a large stop in the first place and halve your stops? This way I can, rather than using a 3 pt-stop, use a 1.5 pt stop and literally halve my risk and almost double my returns. There are still so many traders out there using 3-pt stops in the ES today, I can't comprehend it.
Well, this is the (comprehensive) answer as to why I advocate small stops...
Compliments,
~Scientist
