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Entry, Stoploss, Profit target - What is more important?
Until few days ago I thought that they have the same importance. I even argued that they are like a three leg stool.
There is no one leg that is more important then the other.
Now, after many discussions with myself, I think (know) that entry is the most important of them.
The explanation goes like this: You have a strict rules strategy (does not matter discretionary or automatic).
This strategy gives you X dollars on average per trade. Lets assume that this strategy has 50% win rate.
So if you improve you're stop by 1 tick or your profit target by 1 tick or your entry by 1 tick.
How will it affect the bottom line?
Can you help answer these questions from other members on NexusFi?
Rather than deciding which is most important, I'd like to consider this: which one must be fixed, and which one can be discretionary? I believe the Entry method you choose must be followed without deviation. However, the Profit Target may require some variation, in the event of unusual market reactions while you are in the trade.
Rational being entry dictates the others and if its a good trade the one tick leway will be more profitable over all by "just holding on" to some of the winning trades?
Entry is generally the most important because it defines your edge. If the market is more likely to move in your favor then not then you've an edge. Of course, everything else is important too. Stop loss is probably least important provided that its large enough.
Another way to view this is that you can't really test entries without exits and thus the entry and exit form a non divisible unit.
In reality, if you find an edge and don't close out the trade then your returns will start to match the market returns if long and inverse of market returns if short.
I try and use the context of the pattern (and it's inherent S/R (if correct) to determine SL - in relation to tentative PT expectations - particularly when adding to the position / leveraging it interday.
Entry is one of the least important. Stop loss is one of the most important, it is something you can plan and control and it defines your risk. I believe risk is one of the most important aspects of trading.
Almost everyone focuses on entry when the real focus should be on risk.
I think most people favor entries because of the sense of control it conveys...
"I am not going to enter the market until I see this pattern/indicator/whatever. I decide when to enter. I am not ruled by the market. I am dictating the terms of my entry."
It sounds and feels very empowering, which is always very much in demand when someone is faced with uncertainty.
A few years ago, I had a couple of articles published on 2 experiments I ran:
1) random entry, with different exits
2) different entries, with random exits
My conclusions: "exit rules often overshadow entry rules" & "The point is to check if entry and exit signals are [both] really better than random. "
So, my leaning is biased towards exits being more important, but fully realizing I cannot ignore or diminish the importance of entries.
Interestingly enough, Ralph Vince, in his book "The Leverage Space Trading Model" makes a good argument for position sizing being the ONLY thing that really matters...
Thanks Kevin. I don't have the link right now but search for anti martingale random entry and you'll find a thread. Would welcome your thoughts or participation in that thread.
BigMike: From a system testing perspective, you're always going to start with some sort of entry. That's a strong reason to believe its the most effective. If your stop loss or exit is that powerful then it could also form another entry.
Dr Brett, a good friend of mine in past, wrote a lot about how exits were most important. Sure, your profit/loss will be defined by whether you exit at a profit. But, I could never find a strong argument that convinced me of that. I think his goal was just to get traders to think about exits.
I also ran a test where I looked at if one had perfect knowledge of entries and exits which were most important. The entries still turned out more important for the market I tested. The reason is that during market bottoms the volatility is higher which means the swings are much larger whereas market tops are defined by lower volatility. So, if you're trying to catch the bottom whenever it was, say in 2008, and you missed it by a day then you'd take a huge drawdown because the swings were so big. If you miss the top then its usually not as big a deal because the volatility is lower.
