So doesn't using "tight stops" necessitate
- Thread starter IronFist
- Start date
Ok here are my two and only trades (both losers) today.
I use SierraChart for my charting because I don't like OEC's charting, but I have to place my orders through OEC because the SC interface doesn't support OEC orders yet. Anyway, that's why these are OEC charts here, so you can see my entries and exits.
My SC charts are basically the same for the purpose of what we're looking at here.
My thoughts/comments are placed above each chart. Ignore that median line on there. I don't know how to remove it (I told you I don't like OEC's charting).
First trade:
Second trade:
Now, I'm sure there are going to be people who say "dude, in your second trade you could have exited for 3 points profit!!!!"
To which I will reply:
First of all, at the time you had no idea that 3 points profit was the maximum favorable excursion. Exiting at 3 points profit is stupid and negatively affects your bottom line if price continues on for 4, 5, 10, 20+ points in your favor.
It's a common scam on websites that sell trading programs to show entries that some "super awesome holy grail system" picked, and then show a chart after the fact and say "see? here you could have exited for 5 points!" "and here you could have exited for 2 points!" "And here you could have exited for 15 points!" when in reality, the system gave no exit signals and therefore the user would have had no clue when and where was the optimal exit strategy.
By that logic, it is impossible to know in real time that 3 points was the optimal place at which to exit that trade.
This is further compounded by the fact that all my backtesting has shown (at least with the YM) to be statistically UNPROFITABLE if you exit a winning position after 3, 5, 8, 10, or 12 ticks in your favor. The only way I showed a (slight) profit over time was to hold every position until the trend changed. Doing so results in the occasional "home run," which was statistically necessary to have a positive P/L at the end of the day/week/month. By exiting early after 3, 5, 8, 10, or 12 ticks, you eliminated the home runs from ever occurring, thus reducing the size of your average win compared to loser, thus resulting in negative expectancy. It is worth noting that taking profits after 3, 5, 8, 10, and 12 ticks did result in a higher percentage of wins compared to losers, as there were some positions that went, say 13 ticks in your favor and then reversed into a loss, so those became winning trades, but it still resulted in overall loss because the ratio of wins to losses was significantly less.
As for the 2-1 system or whatever, my futures trading account only has about $10k in it and I don't have the intestinal fortitude to handle drawdowns with TWO contracts. In other words, say my stop is 3.25 points. With 2 contracts, that would be $130 per losing trade, which means that if my first three trades on my first day were losers, I would be down nearly 4% of my account in one day. Aren't you supposed to stop if you get down 6% in one month? I would be 2/3 of the way there in one day (likely in under 2 hours). Forget that. I can only trade 1 contract right now therefore my wins have to statistically beat out my losses and my losses cannot be large and/or frequent.
Therefore, I need a system that maximizes returns over fixed contract lots and therefore, I cannot do this "target profit after 5 ticks" bullshit because one large loss would wipe out numerous gains. And since I am trading 1 contract, I certainly cannot scale into positions as scaling in with constant contract sizes results in loss because it moves your break even point up. The only way scaling into positions works is if your initial position is large and your followup positions are smaller than your first, and I cannot do that.
Therefore, any moneymanagement systems dealing with multiple contracts are out for me, and scaling into positions is also out for me.
And I'm stuck.
I'm not trying to be negative or cynical here, nor am I trying to bullshit anyone. I have spent hundreds of hours manually backtesting this stuff so I can confidently and correctly tell you that if you are trend following, taking profits after x number of points does not work. I will submit that it might possibly work for some people who have a much better entry system than I do (for example someone with a 90% win rate).
Alright ET, have at me.
I use SierraChart for my charting because I don't like OEC's charting, but I have to place my orders through OEC because the SC interface doesn't support OEC orders yet. Anyway, that's why these are OEC charts here, so you can see my entries and exits.
My SC charts are basically the same for the purpose of what we're looking at here.
My thoughts/comments are placed above each chart. Ignore that median line on there. I don't know how to remove it (I told you I don't like OEC's charting).
First trade:
Second trade:
Now, I'm sure there are going to be people who say "dude, in your second trade you could have exited for 3 points profit!!!!"
To which I will reply:
First of all, at the time you had no idea that 3 points profit was the maximum favorable excursion. Exiting at 3 points profit is stupid and negatively affects your bottom line if price continues on for 4, 5, 10, 20+ points in your favor.
It's a common scam on websites that sell trading programs to show entries that some "super awesome holy grail system" picked, and then show a chart after the fact and say "see? here you could have exited for 5 points!" "and here you could have exited for 2 points!" "And here you could have exited for 15 points!" when in reality, the system gave no exit signals and therefore the user would have had no clue when and where was the optimal exit strategy.
By that logic, it is impossible to know in real time that 3 points was the optimal place at which to exit that trade.
This is further compounded by the fact that all my backtesting has shown (at least with the YM) to be statistically UNPROFITABLE if you exit a winning position after 3, 5, 8, 10, or 12 ticks in your favor. The only way I showed a (slight) profit over time was to hold every position until the trend changed. Doing so results in the occasional "home run," which was statistically necessary to have a positive P/L at the end of the day/week/month. By exiting early after 3, 5, 8, 10, or 12 ticks, you eliminated the home runs from ever occurring, thus reducing the size of your average win compared to loser, thus resulting in negative expectancy. It is worth noting that taking profits after 3, 5, 8, 10, and 12 ticks did result in a higher percentage of wins compared to losers, as there were some positions that went, say 13 ticks in your favor and then reversed into a loss, so those became winning trades, but it still resulted in overall loss because the ratio of wins to losses was significantly less.
As for the 2-1 system or whatever, my futures trading account only has about $10k in it and I don't have the intestinal fortitude to handle drawdowns with TWO contracts. In other words, say my stop is 3.25 points. With 2 contracts, that would be $130 per losing trade, which means that if my first three trades on my first day were losers, I would be down nearly 4% of my account in one day. Aren't you supposed to stop if you get down 6% in one month? I would be 2/3 of the way there in one day (likely in under 2 hours). Forget that. I can only trade 1 contract right now therefore my wins have to statistically beat out my losses and my losses cannot be large and/or frequent.
Therefore, I need a system that maximizes returns over fixed contract lots and therefore, I cannot do this "target profit after 5 ticks" bullshit because one large loss would wipe out numerous gains. And since I am trading 1 contract, I certainly cannot scale into positions as scaling in with constant contract sizes results in loss because it moves your break even point up. The only way scaling into positions works is if your initial position is large and your followup positions are smaller than your first, and I cannot do that.
Therefore, any moneymanagement systems dealing with multiple contracts are out for me, and scaling into positions is also out for me.
And I'm stuck.
I'm not trying to be negative or cynical here, nor am I trying to bullshit anyone. I have spent hundreds of hours manually backtesting this stuff so I can confidently and correctly tell you that if you are trend following, taking profits after x number of points does not work. I will submit that it might possibly work for some people who have a much better entry system than I do (for example someone with a 90% win rate).
Alright ET, have at me.
Exactly what I,ve gone thru. Today I was stopped out with a $390.00 loss & the market followed the trend down hours later, as a newbie maybe I should follow the trend down. But as I stated before it,s all about experience & confidence that the trend will continue. I consider the loss as fairly large. So do you let it run with no stops or keep increasing your stop loss tolerance & hope the trend continues?
Well in my backtesting I would use a relatively fast MA such as a 17 period Hull Moving Average to determine "trend." So after a lower low and higher low, when the HMA turned back to sloping downward I would enter at the beginning of the next candle and hold that short position until the candle after the HMA sloped back up.
One of three things would happen:
1. Price would go in my favor and the slope would change after a profit
2. Price would go in my favor but then there would be some giant candle in the opposite direction that caused the slope to change and wiping out all my profit.
3. Price would go against me substantially but the slope would not change so I would not exit, and then it would continue in my favor for a moderate to huge gain.
Play with this extensively in a demo account before you use real money with it. Also go read jjrvat's "day trading 2.0" thread. It's like a billion pages long (depending on how many replies you have set per page), but there's a lot of good info in it, and a ton of questions from me that piss off a lot of other people
