Small Stops

I have to disagree that there exist a perfect stop placement ... for a given entry price, the amount of heat that the trade could take & still end-up being a winner isn't a step function.

What we are dealing with are probabilities ... say I am counter-trend trading the ES, and using an initial stop 3-ticks beyond the current price extreme ... that gives me a 70% chance (I am making up that number) that if my entry signal is correct, I won't be stopped and will indeed have a winning trade here. Now, if I am using an initial stop 5-ticks beyond the current price extreme, I get a 85% chance of not getting stopped if the signal is correct. What is the best stop placement? It actually is a function of how often my entry signal is correct, regardless of the initial stop size (within reason). And that might very well vary with time-of-day, up vs down-trend, and a million other variables.

Re-entry ... costs you comms, slippage & price differential between the 1st stop exit & the re-entry ... not a big deal when (intraday) swing trading, but how effective is that when scalping?
 
Quote from N54_Fan:

I think you are either not choosing your words correctly to get your point across or you are taking inappropriate risks. You should ALWAYS adjust your trading size (position size) based on your account and stop placement. This is Risk Management 101.

For example if I have a $100K acct and I'm buying a stock at $100 with $2 stop loss (@$98) then assuming I want to risk 1% of my capital I can buy 500 shares ($1000 capital to risk/$2 per share = #shares to purchase = 500 shares). The further the stop loss is away from my purchase price the less shares I buy but keep my risk the same...if the stop was at $97 then I could buy 1000/3 = 333 shares MAX.

FoN,... This is an interesting discussion and a valuable one. Thanks for the thread. I have found that for me I identify a trend in mutiple time frames (TF) and see how they all relate. I trade based off the longest TF. For me that is weekly. If the trend is UP I trade with an entry based off TWO TF lower...ie the 60 min TF. When I used to trade based off 1 TF lower (ie the daily TF) then I would have to set my stops too far and had small positions and when i was right I made little money. So I switched to my buy signals off the 60 Min TF and this has made a huge difference for me. Tighter stops and more shares per trade and more money made. This allows me to get in and out of positions much closer to the top or bottom. If get whipsawed a bit it is not usually significant as the 60 min TF will turn Bullish once again. I only buy when the 60 min TF is trending in the same direction as the weekly TF. I use either EMA 13 or EMA 39 as my support and place my buy orders a few pennies from there. (EMA 13 for fast moving trends and EMA 39 for more normal trends). It works really well and I usually will buy close the the bottom of a retracement.

I matched up my method with yours and it seems that they both produce good buy signals but that I tend to catch a BUY before the breakout higher and can set stops even tighter than you. If it blows through my stop so be it. The times I am right far exceed the times I am wrong.

attachment.php
More...
=============
54fan;
Good points, good buy[SPY related ]on the 39ma.

Its probably his choice of words rather than his risk, since he mentioned 1 contract, & worst losing streak/drawdown.

And to use SPY as example, rather than increase the stop size/decrease the position size, which is the same % math.Thats fine;but i would look for something that trends probably better;
especially with $136 area resistance on weekly/daily charts,
& decreasing buy volume.:cool:

Not calling a top in that uptrend;
but its clearly an older trend than FEB 1st/groundhog week.:D
 
if small stop is considered to be smallest setup violation range, what should that range be with respect to projected reward range?

basically, do we care more about R:R or stop amount by itself?

is there a R:R ratio such that further price action understanding or stop optimizing is not required to be consistently profitable week in and week out?
 
Quote from tihfa:

if small stop is considered to be smallest setup violation range, what should that range be with respect to projected reward range?

basically, do we care more about R:R or stop amount by itself?

is there a R:R ratio such that further price action understanding or stop optimizing is not required to be consistently profitable week in and week out?
More...

I doubt there are any eternal principles of R multiples to successful trading, but a method I like has an R multiple of about 3 with a win rate of about 55%.

If something like that gives you a few trades a month and your position size is optimized, you're doubling your account in a year.

:D
 
In my backtesting of ES, small stops work well trading S/R in chop, but in trending markets, larger stops are required. In my own trading, I don't use any Protective stops trading ES, but I do not recommend, I also average down on each trade as well. I think stops are more for a catastrophic occurence, the ES is seldom in this state except for release of reports or new flashes.

It still comes down to your money management rules, whether it is price or time, last thing you want happen is to have Protective stop to be engaged. I had seen way too many traders thru the years allow their stops to take them out of a trade when they could have gotten out earlier to save some tics cause Price had changed trend, or trendlines or pivots gotten violated.

Many traders get into that "hope" phase, like a deer in headlites cause their trade is against them. Too many concentrate on getting in, when they should work on getting out, 5% of the trade is getting in, 95% is the exit.
 
You must log in or register to reply here.
Back
Top