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This sounds entirely reasonable, however, it is categorically untrue. The best trades work immediately in the trader's favor. There are spots where market imbalances become evident to all participants and price moves from point A to point B without hesitation. It is the successful trader's job to identify these inflection points and take advantage of asymmetrical opportunities. How else are you to earn several multiples of your initial risk?
Wide stops are a hedge for ignorance. If you're entering a solid trade - you are fighting with very good traders over every last tick. These situations are infrequent and brief.
Cherry picking these trades is not all that easy...At some point the market will make you pay the price to play.
Finding a statistical advantage comprised of good entries and wide calculated stops will play well when trading the indices. You can easily find a win rate of 34%-38% and a ratio of 2.5/1 - 3.5/1.
The ratio is the markets current payout. The win rate is the price you pay to play and will take larger stops (Hedge) that most will not tolerate.
Finding those ratio's with any higher win rates is going to be hard to cherry pick and that's because of the sideways / Range bound moves...no matter what timeframe you reference.
This is why I feel for a retail trader, its going to be easier to exist using higher time frames with good capital that can with stand bigger stops. Not to mention those edges are easier to find and typically exist for longer periods of time.
Woody, If you're getting 2 to 4 R multiples on your winning trades, I'd suggest that you ARE using a tight stop. For example, if a trader is trading a setup off of a 15 minute chart and using a 1 ATR stop and targeting > 3 ATRs - that's a tight stop in my opinion. No cherry picking going on. A wide stop, to me, would be something greater than or equal to the expected gain. Somebody relying on a very high win rate.
If you're risking 50 pts to make 25 - something like that. The best trades have little to no MAE. They work from the start. Most professional traders that I've worked with have a very low tolerance for trades that aren't working out both in terms of price and time. Somebody like Larry Williams who uses a very wide 'disaster stop' would be more of the exception.
Great traders stalk trade entries where there is an imbalance in the market and it HAS to move quickly. Look what happens in ES and NQ when stops are triggered. For example, on the long side - in a range you'll see extreme negative delta readings on a flush below a recent pivot as stops are triggered. As soon as that last stop is filled you'll frequently see extreme positive deltas just moments later, leaving behind a tail in seconds or less. Those are professional traders, swooping in and buying up all the contracts that thousands of retail traders are puking out. If the rejection isn't quick you probably aren't in a good trade and at a minimum can get a much better price.
The same holds true for breakout type trades. If you are talking about 34% - 38% win rates, I'm guessing that you are referring to breakout or trend following methodologies. Do you know the most frequent time of day - down to the minute - for the ES or NQ to make the high or low of the day? 6 pm EST. That's the globex open. In other words, the globex open offers opportunities sometimes to put on a trade with nearly zero MAE and capture the entire day's range - which is virtually always higher than the average ATR because volatility is expanding in those situations. Even if you are only successful once a month - a trader can make his month catching 250 pts in NQ with 10 - 15 pts risk.
Obviously, there's more than one way to skin a cat. If you are day trading and have a profit factor of over 1.50 for an extended period of time, say 500 days, you're doing alright. If a trader can achieve their goals in a way that is sustainable both financially and emotional for themselves, that's all that matters. Unfortunately this doesn't apply to 99% of traders.
Ok a matter of what's Wide...
Also to clarify, my example was for a break out strategy that does require smaller stops for me (8 Points).
But to be the devils advocate...
What about swing trades using Reversals?
Example:
With ES/NQ, they can be treated as naturally mean reverting markets. You can build a very nice win rate (upper 70's%) at a 3 to 1 ratio. But you will pay dearly in MAE (Maximum Adverse Excursion). So considering the MAE, its and elementary mistake to assume a 3 to 1 means you only risked 1 unit.
In fact most stops will kill a mean reverting strategy (not always, but mostly).
What about breakout swing trades with massive stops (It does work).
Example:
Take a 40% @ 3.5/1 Swing breakout strategy that carries a daily Quarter deviation stop. Using today's Market price and considering volatility...that would be nearly 45 points in the NQ.
Is 45 points a Wide stop?
I think Wide stops for you me just means something different.
45 points would absolutely be a wide stop in NQ. That's nearly 1/3rd of a daily ATR these days.
I'm trying to understand the basis for your belief that trading ranges somehow requires suffering greater MAE? Perhaps in back tests of simple mechanical models this is true.
The ES and NQ are both mean reverting markets, as you mentioned. (Technically, they aren't because there isn't a stable distribution, but that's a topic for another thread.)
IRL, (to borrow from the kids) reversals happen very quickly. We can objectively quantify and observe when stops are getting triggered and when those orders are getting absorbed. We can also objectively observe and quantify when a stop run has run it's course with a relatively high degree of certainty. Old school tape readers have been doing this for centuries. Newer traders can lean on things like MBO data and delta figures.
This might sound overly simplistic - but how many new traders do some analysis, identify the trend, enter a trade and place a stop. Mysteriously the market creeps lower and lower and lower, suddenly accelerates, triggers their stop and abruptly reverses and does precisely what they anticipated in the first place while they sit from the sidelines and watch?
Was their stop too tight? NO! Most likely, their entry was terrible. Too far / too many ATRs from where the market absolutely should not go if the basic premise of the trade is valid. Traders love to wait for some sort of technical confirmation. A breakout of a 5 minute bull candle or the second bull candle or whatever. Meanwhile, they're entering 2 ATRs on that timeframe above the recent pivot or climax low. The market gives a little retest, they get stopped (again), and then they kick the dog and start searching YouTube for conspiracy theory videos.
If you are the guy on the other side of the trade when some kid who just installed RobinHood on their brand new iPhone 12 taps out of their latest impulsive purchase- you don't need a wide stop.
That's my paradigm. I appreciate the discussion. I certainly don't have all the answers - just some observations of what works for me based on reviewing trades, learning from both winning trades and losses.
Howdy! Well it appears that you are down under because Melbourne Fl. has a great governor and has removed restrictions.
The person to ask for suggestions is the person that looks back at you in the mirror in the morning.
My thought are that only you know or will know how to put your trading puzzle together.
Yes, I have also scaled back the number of trades as you have. It never hurts. You might go back to a higher number of trades later on. Me also.
Personally, I look at a 4hr, then the 15 minute. Those I have on a monitor above. "Top Down Approach". My anchor chart is a 5 minute and I use a 30 second or even sometimes 21 seconds for entries.
If I only had one monitor (preferably a bigger sized one), I might overlay a moving average from the slower time frames onto my main chart. Kind of like a moving average ribbon, but would the moving averages would be based on those longer time frames. We can easily do that on Ninjatrader. Not sure what platform you use.
Of course, it all comes down to each of our own abilities to see "value".
My wife absolutely cannot stand my charts. And I don't get enough info off of hers. Such a personal thing.
I do not "instruct" anyone. But, I can share my own experiences. Sometimes someone may find a part of my thinking helpful.
I am sure that you are aware that the contract sizing plays just as in important role in trading as does technical analysis.
For instance, you could enter a trade with one contract. It then goes against you 40 points. If your trading account size will allow it, you could then take another position and turn a large profit in minutes.
So in summary, accounts size with proper use and management of said account are just as important as the technical aspect.
But that is a long subject.
Not sure if we will ever get back down there and take the Great Ocean Road. We won't take the jab, so we might not be back. I would like to have to have gone to the Barrassa Valley. Well, at least we made it to the Hunter Valley.
Great posts on stop losses. It's very individual and subjective. There are traders who after 2 ticks exit n quickly reverse. Use stops at all different intervals.
There is no right or wrong answer. Assuming everyones stops should be the same is assuming our entries n methodologies are the same.
I dont think there is a right or wrong way so long as u follow basic strategy.
Sure is fun to trade though. Frustrating but just amazing
