Small Stops
- Thread starter FreakofNature
- Start date
Yes, or if you see your buy signal on the next higher time frame. If trading daily, look to the hourly for another buy signal for adding. Works for scaling in, too.
Entry setup is all about minimizing risk. Low risk opportunity is the edge.........
One way I judge a system is how close I can set a stop before it impedes profits. One of my best systemz can run a 3.5% stop, another one required 15%.
Funny thing was, the one that could run the tight stop just blew away everything else I have ever seen for total profits.
Signal to noise.
Backtesting (even better your own trading history for that setup) is 1/2 of the answer ... with a large enough sample size (say 500+), you start getting an idea re. what kind of losing streak can be thrown at you. My coach routinely says "take the max drawdown from backtesting and multiply it by 2".
Another 1/4 of the answer is MonteCarlo simulations (using backtesting or historical trade distribution) ... for these to be useful though, you'll have to decide for yourself how far (number of standard deviations) from the mean you want to set you limit for max drawdown.
And I am still looking for the last 1/4 of the answer
Yes that was a little provocative
- and I appreciate you jumping on it.My point is that "assuming I want to risk 1% of my capital (on a single trade)" is a pretty poor position sizing decision, which doesn't take into account the win% of your system nor its payout ratio (average win / average loss) nor any other consideration on its statistical performance. Its a kind of one size fits all risk management, may-be a reasonable start in some cases, but far from allowing one to maximize the return of a given edge & account size.
Quote from dom993:
Backtesting (even better your own trading history for that setup) is 1/2 of the answer ... with a large enough sample size (say 500+), you start getting an idea re. what kind of losing streak can be thrown at you. My coach routinely says "take the max drawdown from backtesting and multiply it by 2".
Another 1/4 of the answer is MonteCarlo simulations (using backtesting or historical trade distribution) ... for these to be useful though, you'll have to decide for yourself how far (number of standard deviations) from the mean you want to set you limit for max drawdown.
And I am still looking for the last 1/4 of the answer
Actually, MC sim should give you almost everything you want to know. If you have a win rate, profit factor, expectancy, and payoff ratio you can run a MC sim to give yiu the ideal % to risk per trade for this system. This is done by deciding what is an acceptable max drawdown and what would be considered "ruin" by the trader trading the system. For me its a 15% max draw down and 35% loss I would consider "ruin". You then run a MC sim and determine the amount of capital per trade to risk that would give a 1% chance of having this kind of DD or ruin. (some may choose a 95% confidence ...ie 5% chance of this happening). So by playing with various amounts of risk you can determine the "best" percent of capital to risk per trade to achieve your goals with minimal risk.
There is one caveat with this method...you are assuming that your system will perform the same in the future as it did when you collected the data. So you must be carefull to trade the system in the same type of markets.
Good luck
N54_Fan
Quote from dom993:
Yes that was a little provocative
My point is that "assuming I want to risk 1% of my capital (on a single trade)" is a pretty poor position sizing decision, which doesn't take into account the win% of your system nor its payout ratio (average win / average loss) nor any other consideration on its statistical performance. Its a kind of one size fits all risk management, may-be a reasonable start in some cases, but far from allowing one to maximize the return of a given edge & account size.
Agreed. But 1% at risk will keep most traders out of trouble that have not run MC Sim on their data becuase so many traders do not even keep stats on their system. In fact most traders do not even have a defined "system" to trade. They just take a trade that looks good without much basis on stats.
Quote from Wide Tailz:
Yes, or if you see your buy signal on the next higher time frame. If trading daily, look to the hourly for another buy signal for adding. Works for scaling in, too.
Entry setup is all about minimizing risk. Low risk opportunity is the edge.........
Precisely why I initiated the thread, as far as Im concerned, there is nothing in trading like low risk opportunity.
FoN
I have to chime in here as I agree with what you had to say in both of your posts on this thread. Indeed this topic about small stop is a very very important discussion that I hope many will participate meaningfully. I think stop and entry goes hand in hand. If entry is excellent, the stop can be really small. If entry is poor (chasing), then stop needs to be big. So it boils down to a really good entry. To ask how to have a small survivable stop is to ask how to find the greatest entry. But then, to be consistent in spotting a good entry perhaps takes a few thousand hours of studying price behavior and will be of a different subject.
For the purpose of this thread, I would just say that my humble opinion is that small stop is the best, compared to very large stops and not too small/ not too large stops. My rationale is that if you don't know how to place an entry in the right place, the chance is good that you don't know where the best stop should be either. The only thing we know is after entry if price did what we expected. Now at least this part is not guessing. Setting an arbitrary stop for a large amount is guessing though.