T-REX Journal

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Stops

If a system has a high frequency of trades (and any daytrading system has this charachter), tight stops usually work best. Systems that trade frequently are trying to make money almost on a daily basis. If the system takes a small loss, then there is always tomorrow; why take a major loss when you know a trade probably will be generated tomorrow?
Moreover, professional traders are well aware of how difficult it is to recover from drawdowns. A 50% loss requires a 100% return just to get back to break even. See here, % loss and % gain necessary to break even.

10% 11.11%
20% 25.00%
30% 42.85%
40% 66.66%
50% 100%
60% 150%
70% 233%
80% 400%
90% 900%
100% broke


Profit targets

Pure profit targets generally don't work. A good portion of the profit that is generated by an S&P day-trading system comes from those days when the S&P takes off and keeps going in the same direction. If you limit these potential high-profit days, then you limit the overall profitability (if any) of your system. 80% of your Profits will come from 20% of your trades (Pareto Principle: in any series of elements, a small fraction in terms of numbers always accounts for a large fraction in terms of effect).
 
Quote from ElectricSavant:

If you are daytrading then yes you need to have closer stops.

agreed

YOU cant determine how much the market will give you on any given day.

agreed

What YOU have to decide as a trader is how much to you anticipate the market should give you vs. how much you are willing to risk to get too that target.

bracketing in a set-up based on MAE and MFE and entering during a probable moment migh fit into the word "anticipate" so ok I agree, but I do not like these words anticipate.....forecast.....as traders trading from price action we should read what the markets "indicate" and what the "probabilities would be with each set-up leading to an eventual entry or exit signal.

Its not insane to have wide stops. It is insane to think that by placing close stops that you can increase your chance of winning.
If the ES has an average daily range of lets say 12 pts. and you use a 2 pt stop! what are the chances that a 4pt price swing will take you out???? about 98.9% you will get stopped out!!

No, you are forecasting from a longer view so your statement is true to you. but an entry based technique on a day trade would be a little more precise. I think we agree here and I am beginning to understand your point of view. but entering in an upside down risk to profit ratio to achieve your goal will require trailing stop exits to grab the points out if you are to improve your "avg win to loss ratio".

Why do you think that most system developers DON'T use stops when they are backtesting? Because it would scew the performance of the system. Why do you think that people want to see Max drawdown & average drawdown????

your point is taken, however the validity of the system would not only be dependant on tinkering with range....it is according to what type of system it is......but you are speaking from your point of view and your system....but your point of view is not the only one.

Because they want to know how much on average they have to risk. This is why the average daytrader CAN'T win over the long term. and the average "TREND FOLLOWER /SWING TRADER" loses a majority of their trades but still manage to outperform the average daytrader.

where did you get this information....? I agree in part but your conclusion is interesting and could be true. I have read that longer time frame traders...not buy and hold.....do better than shorter time frame traders. You have taken it a step further to use the data abut the high percentage of losing traders in general and applied it to swing traders lose too. Which may be accurate. Interesting.....

You CAN'T expect to risk 1pt and make 30pts. IT DOESNT WORK THAT WAY. Trading is ALWAYS unlimited risk / unlimited profit potential when trading Futures (without the use of options that is). Risk is the name of the game. However, if you have a robust system that incorporates short term and long term approaches then you have the holy grail (or as close to it as you will ever come). YOU must change your perspective if you intend to win consistantly over time. And yes you will take some 10 pt hits (or more) especially if your trying to capture a 1/3rd of the weekly or monthly bar.

T-rex.....the way you write this makes sense......but the point that many pro's elude too works....if you only win 30% of the time but have 1:3 ratio....you are more profitable than turning it around. It has been proven, but I cannot back it up.

Alot more could be said but I await your response 1st.


p.s. great comment
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Nice reply.:)

I love great dialogue.

Heres my point. If you are upside down on your Risk Reward (RR) then you inturn will have a higher degree of trade opportunities. When you limit your strategy to only 3:1 you will have in essence limited yourself from achieving many great trading opportunities. Now I'm not referring here to YOU personally because I dont know your system. However, research shows that shorter term time frame trade accuracy is harder to achieve over the long term
because you have to break down the major trend into a microcosm of tick movement.......(FOOT in MOUTH on my part because I don incorporate short term trading into my overall strategy)......If that is the only strategy or trading reference point ...........then YOU (not you personally) are DEAD in the water and floating upside down with a HUGE drawdown over time.

Multiple small losses equal one big loss!:D
 
Quote from MarathonTrading:



Profit targets

Pure profit targets generally don't work. A good portion of the profit that is generated by an S&P day-trading system comes from those days when the S&P takes off and keeps going in the same direction. If you limit these potential high-profit days, then you limit the overall profitability (if any) of your system. 80% of your Profits will come from 20% of your trades (Pareto Principle: in any series of elements, a small fraction in terms of numbers always accounts for a large fraction in terms of effect). [/B]
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Good point. Bad principle.

"I always buck the trend of intellegent notions". - T-REX

That sounds great on paper but in theory.......its FALSE!!!
Hindsite is 20/20. We as traders only know of a developing trend only AFTER it has developed. We never know in advance the magnatude of a move until after we are in it. That is why I use a 3pt profit target on "ALL" trades. NOTE: This 3pt profit target is not necessarily placed in the market as a working order but rather as a target point in which I will definately move my initial stop-loss to break even. In cases where I'm not able to watch the market for whatever reason I WILL place the 3pt target as a working order to get me out at profit.

You must be flexible in this game!:D
 
Quote from MarathonTrading:

Stops

If a system has a high frequency of trades (and any daytrading system has this charachter), tight stops usually work best. Systems that trade frequently are trying to make money almost on a daily basis. If the system takes a small loss, then there is always tomorrow; why take a major loss when you know a trade probably will be generated tomorrow?
Moreover, professional traders are well aware of how difficult it is to recover from drawdowns. A 50% loss requires a 100% return just to get back to break even. See here, % loss and % gain necessary to break even.

10% 11.11%
20% 25.00%
30% 42.85%
40% 66.66%
50% 100%
60% 150%
70% 233%
80% 400%
90% 900%
100% broke


This is a mathematical model in which I can not argue.:(

BUT.....I can argue that my "GAP-MOVE" entry days I use a stop-loss ranging from 4.25 - 7.25 pts = $375.00 MAX stop loss on any given "DayTrade" if you will call it that.

I have about a 93-94% accuracy rate on my "GAP-MOVE" entry days. I do admit that I dont always get filled though.

I don't boast or brag about the accuracy rate on the "GAP-MOVE" entry day set-ups because it was HARD AS HELL to create and backtest. It took over 3yrs to research, backtest, develope, & trade in the market in "realtime" with "REAL-MONEY".

And I do have days where I get stopped out! You cant program that!

So in closing.......if I win 8 out of 10 trades and I use a stoploss of 7.25 pts and a profit target of only 3pts, I will still come out ahead 9.50 pts.

NOTE: I have two systems running simultaneously side by side daily. I normally take the "GAP-MOVE" entry days while holding & adding to "Swing-Trade" positions. This serves to enhance my overall profitability each year.

:D :D :D
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Quote from MarathonTrading:

Loss 2.5 times profit
10 simulated equity curves
starting K = 100

50% probability of win
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DUDE!

What's this? a little explanation please?
 
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