Breakeven Stops: At Entry or 1-2 Tic Profit? | Psychology and Money Management


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Breakeven Stops: At Entry or 1-2 Tic Profit?

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centaurer View Post
haha yea getting way off topic but it is interesting.

I think many people believe that but I am just not sure it is correct. The distribution of trades for entry on ES at 10:06am 3 seconds and 125 milliseconds on 5/13/19 is the same for both of us.

I think it is like trying to argue that the deck of cards is not the generating process in a poker game. Of course the player has strategic options given the deck run out but I do think there is much language used here that is slightly magical thinking. "I didn't stick to the trading plan and so the flush draw didn't hit so I lost."

snax mentioning cargo cult is perfect. I never really think to use that phrase but it is perfect.

I still don't think I'm following here. I'm a discretionary trader, so the items below are in this context. I think of the expectancy formula as having 2 uses:
  • As a display of edge
  • As a metric to compare different sets of trades and whether performance is improving or degrading

On the first point, assuming a large enough sample-set of trades one should expect with random entry to achieve a result that is negative and equal to the spread of the instrument they are trading. If expectancy over a large enough sample of actual results is greater than this, to me that indicates that skill or an edge is present. If it is negative, then no edge or skill is present.

On the second point, assuming the sets of trades being compared are large enough to encompass multiple market regimes and minimize the impact of randomness, then higher expectancy on one set over the other would indicate better performance on that set.

To bring this back to the OP's question then, if moving the initial stop to BE+1 on the set of trades in question increases expectancy over leaving the stop at BE, then it would be the better choice. Obviously there are multiple variables here, size of set in question, stability of market conditions over the set, consistency of execution, etc., that can make this the wrong strategy in the next set of trades, but I don't see the issue with using expectancy as a gauge of which strategy would've performed better.

I'll add a big disclaimer here that I don't believe moving a stop a fixed amount relative to entry makes sense. The market doesn't know or care where your entry was, so saying your market call is "wrong" and you should get out if price retraces to your entry point isn't logical to me, but this will obviously depend on your own strategy.

I do agree with you on your magical thinking comment though. Every gain or positive day is a display of skill and every loss or down day is either a psychology problem or not following a plan when most of them are likely either due to the randomness of the market or simple lack of edge.

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