Trailing stop/Initial stop on futures

slapshot · Feb 19, 2003

Quote from AAAintheBeltway:

Some good points made, particularly by profitseer. There are many things to consider. Personally, I like to use market action rather than an arbitrary price movement to dictate exits. The initial stop is a disaster stop that I really hope doesn't get hit. Generally I have a pretty good idea if things are looking ok or not and I ideally will exit quickly if they don't feel right. I know from backtesting that tight stops are not optimal and will often destroy a good system, but backtesting can't capture your feel when you're in the trade. After the trade has cleared the noise zone, however you define that, then it is a question of first, protecting b/e, and second, deciding what will dictate your exit. I feel a trailing stop is a very poor method of exiting, because you are always getting out on weakness(if long). Still, you don't want to give the whole trade back if you miss a better exit. What I like to do is first, try to hold till the close, second, try to exit on a spike, third, exit on a pattern failure or reversal bar, and finally, if I'm still in a trade that is profitable but losing altitude rapidly, try to retain at least 50% of max profit.

This is similar to how I manage my winners as well - I started using a 3 EMA setup to keep me in "the trend within the trend".

Also looking at longer candles (20, 30, 60 min for example) helps me not get faked out of my trades too soon.

wally_ · Feb 19, 2003

Quote from AAAintheBeltway:

Some good points made, particularly by profitseer. There are many things to consider. Personally, I like to use market action rather than an arbitrary price movement to dictate exits. The initial stop is a disaster stop that I really hope doesn't get hit. Generally I have a pretty good idea if things are looking ok or not and I ideally will exit quickly if they don't feel right. I know from backtesting that tight stops are not optimal and will often destroy a good system, but backtesting can't capture your feel when you're in the trade. After the trade has cleared the noise zone, however you define that, then it is a question of first, protecting b/e, and second, deciding what will dictate your exit. I feel a trailing stop is a very poor method of exiting, because you are always getting out on weakness(if long). Still, you don't want to give the whole trade back if you miss a better exit. What I like to do is first, try to hold till the close, second, try to exit on a spike, third, exit on a pattern failure or reversal bar, and finally, if I'm still in a trade that is profitable but losing altitude rapidly, try to retain at least 50% of max profit.

I'd like to second this particularly that part about tight stops not being optimal. They certainly are not if you want to capture bigger profits. Also, it's good to realize that volatily (the magnitude of daily ranges) plays here some role too. The ES daily ranges for the last 2-3 months have been considerably smaller than during the last summer for instance.

harrytrader · Feb 19, 2003

The Expectancy formula is:

Expectancy = Probability * Gain

Nature law is often quite frustrating that when you want improve one term, the other degrades and vice versa and that the person who don't realise this and try to get both is a Holy Grail researcher. I pretend that this Holy Grail exists

but it is not easy to find it so let's rather behave as it doesn't exist since it is the case of the huge majority and as a consequence you have to chose BEFORE TAKING ANY TRADE what framework you favor: either a 1:1 ratio gain with high probability (scalp style) or a 1:2 or 1:3 ratio gain with low probability (swing style). if you try to mix the two you are trying to realise the nearly impossible and you will lose with a probability of one at term. It doesn't imply that you can't exit with a 1:1 ratio or even less in the swing framework it means that when you do so it is because you have proved yourself you were wrong and not that you are scalping since it is not the framework you supposedly chose when entering this trade.

wally_ · Feb 19, 2003

Quote from harrytrader:

The Expectancy formula is:

Expectancy = Probability * Gain

A more correct formula has two terms:

Expectancy= prob_of_success*magnitude_success-prob_of_failure*magnitude_of_failure,

to put it in a general way.

slapshot · Feb 19, 2003

Quote from harrytrader:

The Expectancy formula is:

Expectancy = Probability * Gain

Nature law is often quite frustrating that when you want improve one term, the other degrades and vice versa and that the person who don't realise this and try to get both is a Holy Grail researcher. I pretend that this Holy Grail exists but it is not easy to find it so let's rather behave as it doesn't exist since it is the case of the huge majority and as a consequence you have to chose BEFORE TAKING ANY TRADE what framework you favor: either a 1:1 ratio gain with high probability (scalp style) or a 1:2 or 1:3 ratio gain with low probability (swing style). if you try to mix the two you are trying to realise the nearly impossible and you will lose with a probability of one at term. It doesn't imply that you can't exit with a 1:1 ratio or even less in the swing framework it means that when you do so it is because you have proved yourself you were wrong and not that you are scalping since it is not the framework you supposedly chose when entering this trade.

See Harry?

We can agree on some things (like the above). Using a swing entry and a scalp stop usually doesn't pan out.

I have seen another trader on this board (sorry, can't remember who) call the errant mixing of trading styles "systemmessionary"

and I will admit that I have suffered from this problem in the past...

I had to decide what type of trader I am and let each of my setups dictate the proper stop amounts.

Mixing Scalp with Daily Range/Trend with Swing did not work for me. I am not a scalper although I am aware of the benefits.

A person really gets a feel for their personality type when defining their trading style - or should that be the other way around? :eek:

Regards,

Paul

candletrader · Feb 19, 2003

Quote from wally_:

A more correct formula has two terms:

Expectancy= prob_of_success*magnitude_success-prob_of_failure*magnitude_of_failure,

to put it in a general way.

Better still:
Pre-commission and pre-trading costs average aggregate daily expectancy =

[(prob_of_success*magnitude_success) - (prob_of_failure*magnitude_of_failure)] x Opportunity Factor,

where Opportunity Factor is average number of trades per day...

wally_ · Feb 19, 2003

Quote from candletrader:

Better still:
Pre-commission and pre-trading costs average aggregate daily expectancy =

[(prob_of_success*magnitude_success) - (prob_of_failure*magnitude_of_failure)] x Opportunity Factor,

where Opportunity Factor is average number of trades per day...

Correct if you want to have it per day and not per trade. My formula was per trade, the one proposed by you is per day, that is, it gives the expectancy for an average single day.

candletrader · Feb 19, 2003

Quote from wally_:

Correct if you want to have it per day and not per trade. My formula was per trade, the one proposed by you is per day, that is, it gives the expectancy for an average single day.

Wally,

Any coherent analysis of expectancy will impute the opportunity factor... identical per trade expectancies with differential opportunity factors will result in different aggregate profits...

I hope that helps.

Candle

harrytrader · Feb 19, 2003

And if you don't like Ideal Gas Law PV=nRT you can have

(P1 * V1) / (Z1 * T1) = (P2 * V2) / (Z2 * T2)

You know what I mean: my formula was just as simple as for the goal purpose

Now when you say that

Expectancy= prob_of_success*magnitude_success-prob_of_failure*magnitude_of_failure,

It can be a good formula for scalp but not for swing because the distribution of winners and losers for swing is hetereogeous and it would better to separate the two or you will obtain something like the expectancy of a mixed population between Giants and Lilliputians

.

Quote from wally_:

A more correct formula has two terms:

Expectancy= prob_of_success*magnitude_success-prob_of_failure*magnitude_of_failure,

to put it in a general way.

candletrader · Feb 19, 2003

Quote from harrytrader:

It can be a good formula for scalp but not for swing because the distribution of winners and losers for swing is hetereogeous and it would better to separate the two or you will obtain something like the expectancy of a mixed population between Giants and Lilliputians .

... very true