A Time Traveler and a Trade | Traders Hideout

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A Time Traveler and a Trade

  #22 (permalink)

North Carolina
Trading Experience: Beginner
Platform: NinjaTrader, Tradestation
Favorite Futures: es
Posts: 644 since Nov 2011

@lax99 Yes, I have did something similar many times ES too-- even taking zero ticks risk on many trades. It is possible to trade, also, with extreme precision on the ES. Yes, I understand what you are trying to say but still even if you can often do this unless you're trading with 1 tick stops then you are allowing for possibility of greater risk. This idea you have is very similar to my concept of "market cognition" as to how price discovey works.

As for your question, it is always going to be the case that it is better to lose a smaller amount per trade if the edge per trade is the same. A string of trades or one trade doesn't matter: if your edge is the same and the trades are independent.

Now, as I shared before, if you are trading on a different, longer, fundamental wavelength of information then it may be better to take more ticks of risk.

One way to think about this is a ratio of information. If your trading with 1 tick stop loss, you will most likely be targeting at most several ticks. If you were targeting 4 ticks, you have 1:4 risk/reward and your tick is basically 25% of the information. On the other hand, if you were targeting 10 ticks of profit, your tick 1 tick is only 10% of the information in terms of the range.

If you are trading in a statistical manner and treating each trade as an independent event then it really doesn't matter if you take 8 losses of 1 tick. What you may be grappling with is if you are not trading in a statistical manner, and I'm just conjecturing here, if you take a 1 tick loss but it doesn't invalidate your hypothesis for the trade and you take a series of losses. Let's say you take 8 losses in a row: you have a dependency on the original hypothesis. Serially correlated losses are a very serious matter because they can cause you to lose more with stop losses then without taking stop losses when the horizontal movement exceeds the vertical expansion. Also, if you are trading 8 losses of 1 tick on the same thesis and then let's say the idea works out. You do not limit your loss to the same because you have to re-enter which can cost you at least another tick.

In summary: it is obvious if you can risk less per trade with equivalent edge then that is the better thing to do. On the other hand, if your trades are dependent and/or become serially correlated then it can be a serious matter. So to answer your question: I would always choose to lose only 1 tick per trade if my edge is the same versus 8 ticks. But simply even speaking of 8 ticks of losses of 1 tick, you are peeking into the future so to speak to know that and/or you may be implying the losses are serially correlated. Serial correlation is a serious risk when trading with tight stops: in that case, I would prefer to take 8 ticks as a single loss.

Now for a bit of a tangent but may be useful, it may help to understand or think about accuracy, precision, persistence, and uncertainty. I have saying: "The market judges one according to one's claims." Meaning simply, if you try to trade with 1 tick stop loss you will win or lose based on how well you can do that: if you trade with a larger risk then that will determine how well you can do. It is a common fallacy to believe that one can predict the market by looking at the longer trend. Even if or when true, the precision is often too poor to make any exceptional profits. On the other hand, as you zoom in, yes you should be able to make more precise predictions but the problem becomes uncertainty. For example, let's say your fundamental wavelength of information is a daily bar. Most of the noise one can imagine is filtered out at that view compared to say if your edge is only a few ticks. While you may have a precise edge when trading with a few ticks, even a single large trader with more capital could game you by simply discovering your edge, the optimal stop, then running it and taking the profit. Basically edges on longer time frames are probably going to be more stable but your information is more stale and less relevant. On shorter time frames, your information is more recent and better but greater uncertainty comes into play due to very temporal nature of things.

Last edited by tpredictor; May 20th, 2018 at 06:16 PM.
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