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Risking 2 for 1.. probability & the bottom line.

  #8 (permalink)

charlotte nc
Trading Experience: Master
Platform: ninjatrader
Broker/Data: NinjaTrader
Favorite Futures: Emini (ES, YM, NQ, ect.)
Posts: 379 since Jan 2015
Thanks: 69 given, 917 received

Hi Revan,

There is definitely a right way and wrong way to go about this... (Scalping for 1 tick). Rather than tell you that you can't succeed, I will share a few things that might help you.

1. Know when using a higher leverage (Risk = 2x or > than Reward) is a smart move and when this is a bad move. Hint: If the market is a high volatility cycle you will get killed. But if the market is in a low volatility cycle this can work.

2. Understand that every fill you get will likely be a toxic fill, so you will be down 1 tick to start every trade. So when setting your risk / reward setting, you need to build in slightly more favorable odds than 1 tick profit vs. 2 tick loss. If you are planning on crossing the spread than your odds are far different that what you realize. Here is what you are doing behind the scenes.

1. Entry: This cost you 1 tick just to get filled (assuming you are using limit orders)
2. So now you are down 1 tick, heading into the trade. So know you need to head the other way 2 ticks just to hit your target, but to get filled you will need to pass through it most likely, so you really need 3 ticks from here. For example.

2000.00 2000.25 You have a limit order to buy the bid at 2000 here.
1999.75 2000.00 Your buy bid gets filled here because the price trades through you.... So now you are down 1 tick.
2000.00 2000.25 The price moves back to the original level, so now you are flat. This counts as 1 price level
2000.25 2000.50 The price moves up one level, so you are now up 1 tick (Assuming you had an exit in place at 2000.25 from the start. If not, then you now have to try to exit and this will take 1 more tick to clear.

If you have your exit order already in from the start of the trade, you can get out of the trade in far fewer price levels. This concept is likely too advanced for you at this stage because it requires auto-trading with a platform that allows you to both be short and long at the same time. This is the only real way to do this IMO. This is how all the pros do it, and it also provides several other edges as well.

But now back to the math... So you will likely need to travel 3 ticks to clear your trade with just a 1 tick profit. Considering that you will have a toxic fill to start, and once you hit your 1 tick profit, you will be trying exit then and not from the start.... being late will cost you 1 additional tick.

By contrast, your path to a 2 tick loss is much easier. You are already down 1 tick from the start due to your toxic fill. Now unfortunately you will most likely be using a market order as your stop loss.... and unfortunately unlike a limit order this will fill almost immediately once the price level that contains your stop comes up... And this price level comes up in just 1 tick!

For example

Bid _______Ask
2000.00 2000.25 Buy bid here
1999.75 2000.00 Filled Long with a toxic fill, so you are down 1 tick
1999.50 1999.50 Just 1 price level moves against you and you are out with a two tick loss... Getting filled instantly at Bid = 1999.50

So the math on this is really this:

To win: It takes 3 ticks, and you earn 1 tick of value
To lose: It takes just 1 tick and you earn - 2 ticks of value

You pay commissions both ways.

If you are seeing any success on your backtesting / SIM trading system, this is due to a failure it has in properly handling limit orders and filling based on queue positioning correctly. You should assume at the retail level, the only path to a fill is a toxic fill. The exceptions will be < 10% of your total trades. So my examples should be realistic for your case.

I am not going to say that you can't find a directional edge so great you can't combat this.... but it is a very long climb. There are much easier paths for you. Here are some alternate ways, you can stick with the 1 tick idea but have a real shot at this.

1. Set your stop loss much higher. If you move your stop loss up to 4,5,6,7,8, etc, and you are in a tight ranging market, you will likely hit your 1 tick profit so often you can beat the overall expectancy... But the key to this is finding exactly what the threshold is for your stop loss target relative to the range the market is moving in. If the market is moving in 5 tick ranges and has been for the last 3 hours.... Then this means at any time in that 3 hour period, you could have set your stop loss at 6 or 7 ticks and never got hit once... You would have been bouncing around hitting your 1 tick profit every time. There are market cycles perfect for this, but you have to understand when to play and when to sit on the sidelines. As soon as the volatility shoots up beyond a certain point this will fail big time.

2. You can gain edges by never crossing the spread. This is more advanced, and will likely require auto-trading. This will help your edge overall.

3. If you double quote both sides. (Buy Bid / Sell Ask) at the same time, you can travel a much smaller distance to your fill, because you will be in the queue and at the right price level far enough in advance you can get filled with 1 to 2 price levels not 3 for your profit.

4. Also double quoting, can lead to some more advanced edges. The overlapping probabilities of getting filled both toxic and non toxic increase your overall fill rate and lead to a mathematical synergy of around 10% to 20%.

5. If you are aiming for 1 tick for profit, you can chose to aim for a scratch (Break even / pay only commissions) on your losers. This will give you a lot of margin for error.... You would need a very solid classification system to understand when you can / should scratch a trade relative to the price level.... But in auto-trading this is a common edge.

I think that overall you need to explore what bet you are actually making. Study the odds of this bet. Get the raw data for your instrument, and play with it... Never trust a SIM / backtesting tool. Most don't handle the world of scalping well at all.

Just a few ideas... Hopefully not to discourage but to get you thinking about better ways to pursue this.


Revan View Post
So I've got the order book thing going, I'm waiting patiently and spotting these breakouts, if I don't see any I don't trade, truth be told it's almost as if I choose whether I win or not. what I can't choose is to always have opportunity, but not trading is not losing either, just trade when there is.

I got my target at one tick, I'm thirsty and will take what I can get besides you gotta admit it's less probable to go up another tick, it's just how it is.. I'm not greedy, I "won" - why not cash in?

Stop is below the bid -2 ticks, and with big leverage, ouch. Thank goodness for the win rate. it's still worrying however, is there such thing as a stop limit at the bid or do I need to raise the target to two ticks?

I just feel attached to this one tick target, it's also better for semi-automation where as if it were 2 I would really need to self manage which stresses me and takes toll on energy/mood.

If I see the offer is about to break and I market into it and there is a fair bid which I would be last in the que of, I can't see how stop limit at the bid would be that bad.. a stop limit at the bid I say.. hm.

I'm using sierra chart but the sim don't like it, sets it off at the last price rather than having a que like a true limit order.

The big loss does have one benefit, it benefits, it keeps my win rate up out of fear. I'm trading with damned Gregorian chants of Rome playing through my headphones.

Here's what I kind of think. If I'm always getting the EDGE marketing in as the bid/ask breaks then perhaps -2 ticks is only for a brief and highly improbable moment and I should use a trail stop to then bring it up to -1 stop loss once it breaks over.

But then again maybe I should let it breath, the market moves small volume over the top as big volume pushes it underneath the scenes.

With all these factors I'm having trouble, I need the advice of some good scalpers here, my futures experience is just what my profile says "None" I've never traded a live contract.

Please no people telling me I can't do something without explanation, what is second nature to you is unknown to others.

In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
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