Stops and Risk Control - ES

[rknas]

I trade the ES using fixed risk stop - as in if my account is 25K and my risk is fixed at 5%, my total stop can't be more than $1250 for a single trade. I wait for a reaction on my entry chart, place stop below/above the reaction area and adjust for size based on entry/stop needed.

While this works when it does, one problem is that the market fakes a lot. Also it is typically a tradable area of anywhere from 5-25 points (depending on signal chart timeframe).

What do the pros who are consistently making money in the ES using for stops? Goal is to eliminate death by a thousand cuts (aka small stops) while also keep risk to pre-defined levels.

These are swing trades (lasting a few days), trying to capture movement on 240 min or daily charts, not scalp/day trades.

 

[Overnight]

...

What do the pros who are consistently making money in the ES using for stops? Goal is to eliminate death by a thousand cuts (aka small stops) while also keep risk to pre-defined levels...

"Pros" do not daytrade futures like us wanker retailers, with stops. They use futures in big blocks to hedge against their option and stock positions over a longer time frame.

 

[Real Money]

What do the pros who are consistently making money in the ES using...

Like Overnight said, many participants are looking for better risk/reward than the outright trade can provide (either because they want to or because they have to). Using options or a stock/index spread can offer more trade opportunities and reduce drawdown.

An example using futures is provided below. The data (white) is of a synthetic index constructed using futures (long 2x ES contracts, short 1x NQ). This position is exposed to the broad market but with some hedging out of the large cap non-financial (high beta) risk. Not all, but some.

This futures spread will track the market closely.

However, since you are (in effect) buying $414,625 dollars worth of SPX exposure and simultaneously selling $253,302 dollars worth of NDX exposure, the risk/reward (aka price action), technicals, maintenance margin, liquidity and execution risks will differ from an outright ES trade.

For some pros, that tradeoff is favorable.

This type of dynamic is present in all futures markets. Stops are more difficult to manage with a spread involving multiple instruments or with assets on multiple exchanges, subject to differing margin requirements, etc.

Check it out. ES makes a bottom while the spread put in a double bottom. The two are trading in tandem, but the price action is quite different. Compare the two. Futures, options, and cash stocks, spreads and combos, are used to alter the risk/reward of a trade.

 

[David's faith]

5% is much. When swing trading I go for .25% risk. You could do this with with MES. Refining your entries might also be a point to work on.

 

[SimpleMeLike]

What do the pros who are consistently making money in the ES using for stops?

Good Morning rknas,

Can you please explain your meaning of "pros"?

Thank you,

 

[Handle123]

Anything above 5 minute timeframes, automation is hedging position when initially placed, risk for me is defined by signal pattern and how many options bought to how many Index calls/puts were accumulated.

As @David's faith had suggested, "Refining Entries" is best way to reduce trades that in past have that have so so win/loss.

I could never risk $1250 on a single contract, most I risk is $250 with a hedge. Once price goes in favorable direction, lift hedge and adjust PS.

 

[CannonTrading_Ilan]

My colleague Joe Easton had the following PERSONAL opinion/preference to share:

using a 4 hour chart and $1250 risk, wanting to swing 2 contracts you have 6 points. In my experience "pros" use stops of 4 points or less. With this logic, you could do three ES contracts, although you have to be more precise on the entry. 6 points and two contracts, is safer (less stop outs) statistically although you still have to have precise entries. With a proper risk to reward you should be taking profits no earlier than 12-15 points profit if risking 6 points, and better yet the higher end of you range mid 20s in points. As long as you are leaving your stops and not trailing them or exiting to early, you should either get stopped out minus 6 points or hit your target between 12-25 points. If you get an entry on a 4 hour chart, this may happen one more time in the same bar, there should not be more than 3 tries.

 

[speedo]

5% is an arbitrary number. Stops should be placed at such points where the premise for the trade is no longer valid. Typically that will be a support/resistance levels. What constitutes S and R needs to be determined by you through a process of learning price behavior and testing.

 

[SimpleMeLike]

5% is an arbitrary number. Stops should be placed at such points where the premise for the trade is no longer valid. Typically that will be a support/resistance levels. What constitutes S and R needs to be determined by you through a process of learning price behavior and testing.

Good Morning Speedo,

Question:

Do you mean to say "Stops should be placed at such points where the context has changed for the premise of the trade"?

For example, if I went short at Black Dot, should my stop be at purple dot, because context will change to bullish if price makes it up that far against my trade?

In other words, premise is subjective per the eyes. If I recall, Brooks says the purple dot is the stop loss.

 

[speedo]

Good Morning Speedo,

Question:

Do you mean to say "Stops should be placed at such points where the context has changed for the premise of the trade"?

For example, if I went short at Black Dot, should my stop be at purple dot, because context will change to bullish if price makes it up that far against my trade?

In other words, premise is subjective per the eyes. If I recall, Brooks says the purple dot is the stop loss.

View attachment 285899

While shorting closes in a strong down trend is valid, it's deep into the move by that point. I would wait for a pullback if not already short by that point. The black dot would be the most conservative stop but IMO too generous given your proposed entry. And yes price is dynamic and context is always subject to change. As an example, say on a pullback entry. you could place the stop over/under the entry swing and keep it there or you could go flat if the close of the entry bar did not close in the direction of the trade.....depends on one's trade plan. Any trade can fail and there is no perfection in trade management. The best any of us have is an edge and the discipline to protect it.