Risk management in today's market
- Thread starter granville x
- Start date
Quote from swoop[TR]:
Yes brother candletrander, that is what I meant
Have a fun WE.
Hehe, you too
Opw, when I started trading, I mostly traded different stocks, but with time I learned that I was more successful concentrating on one vechicle. That was QQQ with all the advantages it offers. I've also looked at Nasdaq e-minis. It worked fine with the intraday moves and follow-through on breakouts that we had some time ago. But today, neither of them happen enough to make me a happy camper 
Candletrader, I often take profits (often by scaling out) before my price objective, due to minor S/R or other signals like candlestick, and my 3R objective is not reached. When setting the initial stop, I try to find the logical place, like, for a long trade, just below a support. If I have a reasonable entry price, it's usually around 0.07 points away. In my first post, that is what I started with and which led to a need for 0.30 point reward with a 3R profit, meaning 1% for the Q's. Some time ago, that was usually no problem (1% moves from a nice breakout or other setup), but today I find it tough.
So, perhaps a way would be to change my 3R objective to 2R in this market? With the same 0.07 point stop loss, the reward would be 0.16 points or about 0.5% (0.07*2 + 0.02 fee).
My main question, and what I'm curious about, is how you others have adapted your trading to fit this difficult market (at least I think it is) to stay successful.
Candletrader, I often take profits (often by scaling out) before my price objective, due to minor S/R or other signals like candlestick, and my 3R objective is not reached. When setting the initial stop, I try to find the logical place, like, for a long trade, just below a support. If I have a reasonable entry price, it's usually around 0.07 points away. In my first post, that is what I started with and which led to a need for 0.30 point reward with a 3R profit, meaning 1% for the Q's. Some time ago, that was usually no problem (1% moves from a nice breakout or other setup), but today I find it tough.
So, perhaps a way would be to change my 3R objective to 2R in this market? With the same 0.07 point stop loss, the reward would be 0.16 points or about 0.5% (0.07*2 + 0.02 fee).
My main question, and what I'm curious about, is how you others have adapted your trading to fit this difficult market (at least I think it is) to stay successful.
risk management huh. where did you get this 3 to 1 ratio?
from backtesting i'm presuming, or is it just some magical number you pulled out of the air? some hypothetical ideal?
if you can achieve on average a 3 to 1, then you only need 1/3 of your trades to be winners to breakeven. you can get stopped on 2/3 trades. however this won't stop you going broke. in this world your chances of having 10 losers in a row are (2/3)^10= 1.7%, say 2%, 5 losers about a 14% chance.
risk management is essentially about getting your size right to survive the game you think you are in. if you are betting to big (the wrong size) in this game you have a great chance of going broke, to small and your system (risk adjusted returns) won't be profitable.
obviously stops will degrade your W/L ratio, but the tradeoff is your losses will be smaller (like paying a smaller option premium, correspondingly the prob of success decreases).
saying stops are for sissies is a of crap...it is system (game) dependent!
you obviously have a lot of thinking to do. i can't actually believe you are trading real money without having thoroughly explored risk management. baffling.
from backtesting i'm presuming, or is it just some magical number you pulled out of the air? some hypothetical ideal?
if you can achieve on average a 3 to 1, then you only need 1/3 of your trades to be winners to breakeven. you can get stopped on 2/3 trades. however this won't stop you going broke. in this world your chances of having 10 losers in a row are (2/3)^10= 1.7%, say 2%, 5 losers about a 14% chance.
risk management is essentially about getting your size right to survive the game you think you are in. if you are betting to big (the wrong size) in this game you have a great chance of going broke, to small and your system (risk adjusted returns) won't be profitable.
obviously stops will degrade your W/L ratio, but the tradeoff is your losses will be smaller (like paying a smaller option premium, correspondingly the prob of success decreases).
saying stops are for sissies is a of crap...it is system (game) dependent!
you obviously have a lot of thinking to do. i can't actually believe you are trading real money without having thoroughly explored risk management. baffling.
Paxton, what I try to do is to find setups with likely rewards of at least 3 times what I need to risk for a stop well placed. I find it useful to manage my setups this way.
Some, but not many, of these trades turn out to be 5 or even 10 times the risk. Some I take profit at 2 times, some at 1 time and some are stopped out.
The 3:1 ratio has worked fine before for finding good setups. However, not so good lateley.
Have you changed your trading in any way the last year, how and why?
Some, but not many, of these trades turn out to be 5 or even 10 times the risk. Some I take profit at 2 times, some at 1 time and some are stopped out.
The 3:1 ratio has worked fine before for finding good setups. However, not so good lateley.
Have you changed your trading in any way the last year, how and why?
I agree with you. Here's a quote from another thread. When several of these threads come togehter it will be great for exeryone.
qoute:
It is much better to have a comprehensive solution to all these underlying problems. The theme of the thread is really just a statement of symptoms.
I (maybe like many others) am a little baffled with this 3 to 1 thing.
If you're trading breakouts or retracements and have a 3 to 1 risk strategy, and repeatedly stop out before your target then I would suggest re-examining the criteria you're using to determine your trade setup (initiation) and targets. Once optimized, then backtest to see if your criteria will withstand various market conditions.
Risk/reward can only be determined from knowing trade setup price (initiation) and target price. What indicators or set of indicators you use to determine these two (initiation & target) is the million dollar question $$$$
.One other thing that may be helpful is to use time as an asset. Try using a larger risk initially and lessen your risk with time (trailing stops). No pain no gain.
Much Success to All,
granville your strategy sounds completely ad hoc.
ad hoc strategies are psychologically difficult to trade.
to start with what you must understand is that the outcomes you are realising, come from a probability distribution conditioned by your system (which doesn't actually sound like a system, rather some ad hoc "looks good ex post" approach). they come from a "data generating process", which is stochastic. unfortunately in the markets we can never observe this process, only its realisations. but its realisations will give you clues to the process.
if your system is truly valid then backtest it. if it doesn't work throw it out. kill your baby and walk away. start again. resist the temptation to optimise, or datamine. falsification is the key to this game.
only when you fully understand the "likely" future outcomes of your approach, (that has been robustly validated by backtesting) ,the data generating process can you trade it with any confidence, and an understanding of its risk/reward characteristics.
i suggest you go back to basics, before you watch anymore money walk out the door.
From statistical quality control concept the first thing to know is that each system has its own tolerance, you cannot specify (command) the system (here the market) what you WANT, for example specifying that you want a tight stop whereas it just can't statistically speaking. If you want tight stop you must use better knowledge to chose better your entry point for example which can only present itself on some occasions. These points exist but it comes from my model since you don't use my model you must use rather classical micro-patterns of candlestick, trendlines or whatever other techniques you want (in fact I use them also to monitor the entry if needed in complement to my theorical entry zone). Anyhow there is a simple concept to keep in mind: higher high higher low .