Money Mgmt beats Stops Everytime - Example

[Anekdoten]

Quote from Mike805:

Also, note that placing stops at those levels assumes one has found the trend reversal point which, timing-wise, is a statistically unlikely thing to be able to call with any measure of reliability.

If accuracy is a concern you are better off staying away from picking tops and bottoms.
There are ways to improve such accuracy but still it's a fairly low accuracy trade. On the other hand the reward is extremely attractive and well that makes up for the low accuracy.

In the end, it's all about positive expectancy and trading what you feel comfortable with.

Anek

 

[saliva]

First, I didn't read this thread in its entirety so my apology in advance in case I regurgitate what came before me. Now, I should also mention that I trade ES rather than ER. I'm quite certain that they move more or less in tandem. I'm also pretty damn certain that smart money don't place their stops out of random like 1 point or 10 points from their entries. Even more striking is that prices don't automatically reverse once these random numbers are hit. Prices more often run from one extreme to another extreme. That is, the range is established between the predefined support and resistance. Those are the places where the majority of stops are located and, lo and behold, it's when they're hit the market often reverses.

 

[ProfitTakgFool]

No, not many are convinced. This is what stood out to me the most

"1 day earlier might work now, but may not be sufficient a few months from now."------->>>> I'm alway faced with the dilemma of fading the extreme move early or late and it typically comes down to a read on price action but that's fairly easy to get wrong. The short comings of timing this type of trade can be offset by scaling into the position and using a small portion of your account in the beginning and increasing size toward the end. Using stops with this strategy will take your account to zero in rapid fashion.

Perhaps the most important detail with this kind of trading is time. You NEED time on your side. Scaling into a trade with 30 min's left in the day is not a good idea but when the opening bell rings get good and busy.

Quote from MandelbrotSet:

Hey look Profit Taking Fool, you have a friend.

The Perils of Momentum Strategies


Just letting everyone else know you're not crazy. I mean I know you're not, you know you're not, but there are a few folks here who aren't convinced.

 

[ProfitTakgFool]

I actually started doing that when I first began trading futures but I found I would stop out and frequently have to buy at a higher price, which isn't a bad thing of course. As time went by my accuracy of hitting the headless chicken improved so it became much more efficient to take on the drawdown. At first it bothered me but you get used to it.

In most cases, my drawdown does not exceed 1.5% of my account and after I take on some profit I try to use that as a cushion for the next trade if I need it. I guess you could just say I have found my comfort zone so that's where I do my work.

Quote from Anekdoten:

P,

What prevents you from entering, taking a small loss, and re-entering ?

Why must you suffer the pain of watching losses get even larger as you get the correct area correctly ? You see this kills your risk:reward ratio from the start, whether you are making money or not.

If you combine pivots, volume divergence (for stop runs), and market internal divergence your accuracy in pinpointing these "tops" and "bottoms" would increase dramatically, give it a try.

Looking forward to your reply regarding the re-entry solution plus PA suggestion.

Anek

 

[Anekdoten]

Quote from ProfitTakgFool:


In most cases, my drawdown does not exceed 1.5% of my account and after I take on some profit I try to use that as a cushion for the next trade if I need it. I guess you could just say I have found my comfort zone so that's where I do my work.

I wish you have said "1.5%" in the beginning I would have left you alone.

This is "scaling in" while keeping the overall risk at bay. I got absolutely no problems at all with this entry technique, in fact, it's more than adequate for the future's market.

Anek

 

[monti1a]

Quote from Anekdoten:

I wish you have said "1.5%" in the beginning I would have left you alone.

This is "scaling in" while keeping the overall risk at bay. I got absolutely no problems at all with this entry technique, in fact, it's more than adequate for the future's market.

Anek

I agree with Anek...

I use an approach that is somewhat similar to P's approach...but, I go for very long-term profit targets if I'm forced to scale-in to my positions....in addition, when I get a big winner, I add-on additional positions in smaller position size increments....so in essence, I'm scaling in to the market as it is going against me, and further scaling in to the market as it is going in my favor....

However, I ALWAYS use a FINAL STOP if I'm Wrong.

Where most people go wrong when they scale-in, average down, or whatever you want to call it....is that they are shooting for tiny profit targets...I'm against this...If you are going to scale-in as the market is going against you, you must also let the trade run as long as possible..otherwise, your losers will be much larger than your winners, and a few bad trades will wipe-out most if not all of your profits.

 

[vita]

Great discussion. I'd also like to emphasize on considering the location of stops and limit orders (if any) w.r.t. the levels.

I'd also like to share an observation I made recently. From the beginning of 2008, I've noticed that I am getting stopped out more frequently than last year. I know that market operates at an elevated volatility. But I wanted to quantify its impact on my stops. I splitted Mini Dow (YM) data in two parts (Sep07-Dec07) and (Jan08-Jun08). I've calculated the Average True Range (ATR) for ALL bar time scales from 1min to 60min. The results are attached.

The observation pertaining stop loss level is that there has been an average of 25% increase in ATR level for all time scales. This explains why I was getting stopped out more frequently. I was using 12 ticks hard stop, I changed it to 15 and it fixed the problem. The point here is that the hard stop levels are changing depending on the market conditions and is better to be monitored by the above or similar technique.

I hope you found this info useful.

 

[ProfitTakgFool]

I went thru a similar thing but instead of getting stopped out more frequently I was taking on more drawdown than normal so instead of using slightly wider stops I increased my patience to adjust for the higher volatility. I also used to add contracts in the area of 1 ES point. I increased that to the 2 point area and it made a huge difference. A large part of successful trading is making adjustments to the changing market conditions and being very patient. Patience is the most profitable characteristic a trader can possess.

Quote from vita:

Great discussion. I'd also like to emphasize on considering the location of stops and limit orders (if any) w.r.t. the levels.

I'd also like to share an observation I made recently. From the beginning of 2008, I've noticed that I am getting stopped out more frequently than last year. I know that market operates at an elevated volatility. But I wanted to quantify its impact on my stops. I splitted Mini Dow (YM) data in two parts (Sep07-Dec07) and (Jan08-Jun08). I've calculated the Average True Range (ATR) for ALL bar time scales from 1min to 60min. The results are attached.

The observation pertaining stop loss level is that there has been an average of 25% increase in ATR level for all time scales. This explains why I was getting stopped out more frequently. I was using 12 ticks hard stop, I changed it to 15 and it fixed the problem. The point here is that the hard stop levels are changing depending on the market conditions and is better to be monitored by the above or similar technique.

I hope you found this info useful.

 

[rolextrader]

Quote from ProfitTakgFool:

Anek,

Quite the contrary.....my success is based primarily on my ability to read price action. The ER2 takes dramatic plunges into extreme levels when stops are being hit and when they are finished getting run the instrument reverses. It happens again and again and again. It happened on the ES mid-day on Friday and I caught that one as well.

Unfortunately, a plunge in the market doesn't always reverse on the dime I want it to so it's necessary to take nibbles in key areas and build yourself into a position over time.

ER2 is thin, volatile and primarily traded by retail speculators.

ES is liquid, less volatile than ER2 and traded equally between speculators and hedgers.

How can you tell if a down spike in ES is due to: 1)stop triggers; 2) program trades; 3) bots; or 4) a combination of all or a few of these?

 

[vita]

ProfitTakgFool, your point can be actually observed in the ATR data if you plot the growth of ATR vs. chart time scale, i.e. the slope of the ATR curve. See the attachment!

Looking at the chart you notice that the ATR growth (i.e. slope of the curve) is greater than ONE (power growth) within the first 20 minute or so. Why this is relevant because in 2007, it took an average of 15mins for the ATR growth to become linear vs. time. This duration for 2008 is around 21mins. This confirms you point for "more patience" to let things work. The current market condition demands more time to mature an active trend. Another justification for this could be the big-lot traders who nowadays need larger moves and longer time to enter the market in order to justify the added risk due to higher volatility.

Good point.