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ES hypothetical scenario - stop at break even at +1 tick


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ES hypothetical scenario - stop at break even at +1 tick

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  #1 (permalink)
 trendisyourfriend 
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I'd be interested to read your opinion regarding this hypothetical scenario for the ES...

You exclusively fade key levels if all stars line up according to your analysis. You open a new trade with 3 contracts. Your stop loss is 2 points but to protect your capital you bring your stop loss at break even when your profit is >= +1 point.

Is this a good money management practice considering your winning percentage is about 70% (this is equivalent to a 1:1 (Risk:Reward) ratio of 55%.

As i said, this is an hypothetical scenario not something i do but i'd like to hear the plus and minus of such money management tactic ?

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 Fat Tails 
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trendisyourfriend View Post
I'd be interested to read your opinion regarding this hypothetical scenario for the ES...

You exclusively fade key levels if all stars line up according to your analysis. You open a new trade with 3 contracts. Your stop loss is 2 points but to protect your capital you bring your stop loss at break even when your profit is >= +1 point.

Is this a good money management practice considering your winning percentage is about 70% (this is equivalent to a 1:1 (Risk:Reward) ratio of 55%.

As i said, this is an hypothetical scenario not something i do but i'd like to hear the plus and minus of such money management tactic ?

This is a countertrade strategy. It is not easy to define a key level. If you ask 100 traders they will show you 150 different key levels. So you need to catch quite a number of those 100 traders to support you.

Method: Combine fib lines, pivots, trend channels and other concepts of S/R

I think that this concept is a valid approach, if you add some additional criteria

- you don't do this on trending days such as today (trend filter)
- your idea is supported by volume analysis (climax or churn bar)
- you wait for lower timeframe volatility to settle down, before putting on a trade (not catching a falling knife or stepping in front of a train)
- you have determined the appropriate size of your stops and respect them
- you use channels in two different timeframes and only take a trade if price it outside the channels

Let us call this an outside-in trade, which is a mean reversion trade, where you trade from outside the channel back to the inside.

I do not think that you will achieve a winning percentage of 50%, but you may have some large gains with the second contract, if you trail it approriately, to make this strategy work.

It is psychologically difficult to do this, because countertrades usually take a longer time to play out and you will often be stopped out at breakeven.

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 trendisyourfriend 
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Fat Tails View Post
This is a countertrade strategy. It is not easy to define a key level.

...

I do not think that you will achieve a winning percentage of 50%, but you may have some large gains with the second contract, if you trail it approriately, to make this strategy work.

It is psychologically difficult to do this, because countertrades usually take a longer time to play out and you will often be stopped out at breakeven.

You are right in that we can be stopped out at break even often but you protect your capital which is in essence the key to win. OK, yes it is a counter trend trade but Market profilers should be able to detect key levels during the RTH and be able to achieve >= 70% bounce of 1 point most days at key levels if they consider market internals, rotational factor etc. (the usual stuff). Today's was a good case of responsive buying and some Market Profilers i know did more than 20 points and some 40 points on the ES.

So irrespective of the strategy but considering the winning % i wrote, is this money management a good tactic (your winning percentage is about 70% (this is equivalent to a 1:1 (Risk:Reward) ratio of 55%.) ?

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 Fat Tails 
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trendisyourfriend View Post
So irrespective of the strategy but considering the winning % i wrote, is this money management a good tactic (your winning percentage is about 70% (this is equivalent to a 1:1 (Risk:Reward) ratio of 55%.) ?

What you want is a positive expectancy and low draw downs. You talk about a winning percentage of 70%.

This means

30% losers at 2 points
23% winners at 1 point (first profit target)

and for simplicity reasons, let us assume (it needs some assumptions!)

20% winners at break-even
15% winners at 2 points (second profit target)
12% winners at 4 points (third profit traget)

The R-Multiple (average winner / average loser) would be 1.44/2 R = 0.72 R, and the expectancy becomes 0.30 * (-2 pts) + 0.20 *0 pts + 0.23 * 1 pts + 0.15 * 2 pts + 0.12 * 4 pts = 0.41 pts . which is positive, but not overwhelming, if you deduct slippage and transaction cost.

The high winning percentage is good, as it reduces the overall drawdown of the method.

Would be better to find an entry which does not need such a wide stop.

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 cw30000 
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trendisyourfriend View Post
I'd be interested to read your opinion regarding this hypothetical scenario for the ES...

You exclusively fade key levels if all stars line up according to your analysis. You open a new trade with 3 contracts. Your stop loss is 2 points but to protect your capital you bring your stop loss at break even when your profit is >= +1 point.

Is this a good money management practice considering your winning percentage is about 70% (this is equivalent to a 1:1 (Risk:Reward) ratio of 55%.

As i said, this is an hypothetical scenario not something i do but i'd like to hear the plus and minus of such money management tactic ?


I have try this method and it didn't work for me. I only use 2 contracts instead of 3. The breakeven get hit over 50% of the time. That mean if you have 1 full 2 points loss, it will take you 3 or 4 times to make it back. If you trade 3 contracts, you will need a lot higher winning %.

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 Zoethecus 
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The ES graveyard has a waiting list with traders who tried to make a living scalping with similar MM. The ES is a seductress who, once you succumb, will rip your heart in two and leave your account for dead.

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 Michael.H 
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Short answer is no....
You'd probably be better off doing the exact opposite.

If you really want to know, test it out on sim.
People have a misconception that making money has to do with the percentage of times you are right. Its more about risk reward. You could be right on only 30% of your trades and still make money. The percentage of times you are right on profitable trades has more to do with how much leverage you use. If you have positive expectancy while only being right on 30% of your trades, you def don't want to be risking 10% of capital per trade because statistically you'll blow up your account by the time the winning trade comes.

I can tell you from experience that when you trade, you have to make sure that you can make more on the trade than what you are risking, or you'll break even at best. It doesn't matter how you employ this. It could be through trade management, trailing stops....etc

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Michael.H View Post

I can tell you from experience that when you trade, you have to make sure that you can make more on the trade than what you are risking, or you'll break even at best. It doesn't matter how you employ this. It could be through trade management, trailing stops....etc

Completely agree. Worth repeating. Also people forget than its not uncommon to need to return more than 10-15% a year (read: a lot) just to breakeven after commission costs. People also think you should be able to double, triple, or more (1000%) return on your account, which is just insane. Yes it is possible but highly improbable. The only way to try to reach a goal like that is to risk far more than any seasoned trader ever would.

Mike

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