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Trade management and stop runs


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Trade management and stop runs

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  #1 (permalink)
Saint Joseph
 
 
Posts: 11 since Nov 2018
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So trade management is the skill that really makes a difference in our performance, but to manage a trade well, we have to at some point decide on what is the correct way to manage a trade in certain situations..
I can't really decide the proper way to manage a situation like this, and it runs through my head constantly... I think about this stuff all day it seems, so any input would be appreciated.

*for context, I consider myself a scalper, and the events I'm speaking of are short term moves*

Anyone who has been trading ES for a while knows that it tends to shakeout weak hands before making a move. So say the market has declined after making a strong move up and you go long on a pullback when you see price holding an area. You anticipate this area being the low of a pullback, and for price to go up. There is a window of time where you don't know if this is going to work, and perhaps it's taking longer than you want it to.

Now in your head you know that it could run stops below the area you entered, and get bought right back up. So using a tight stop below your entry, you could get stopped out but still be "right."

Do you..

a-widen your stop, to give room for a stop run, and stay in the position

b-decide this is taking too long, exit, and wait for a stop run to get in at a better price if the price action looks conducive. (This is basically a time stop, but also includes reading order flow. if buyers don't get aggressive in X minutes after your initial entry, you scratch)

c-let the market stop you out on a tight stop below your entry, see if it in fact does bounce back, and then re-enter (likely close to the same price you had before)

d- take the initial position, with a wide stop, and then ADD to your position when it shakes people out. (in this scenario you are buying weakness, anticipating that price will shoot up very soon)

e- say hey you know what I'm ONLY going to enter when I see other traders getting shaken out, and pass on all of the "clean" pullbacks


in A you forfeit the benefit of being able to have a tight stop, sacrificing R/R ratio

in B you may miss out on moves which eventually work out, and if you still want in, then you will now likely have to enter at a worse price. Also it is somewhat subjective to determine when a trade is "taking too long"

in C you will be racking up commissions, and also you may end up taking your initial stop loss twice as it were, so possibly doubling your risk (depending how far away your NEW stop is)

in D you will be at your largest size when your stop is hit

in E you will miss out on moves which perhaps move much farther, since buyers are more aggressive in this scenario

To me, B seems like the best management, but I'm not sure. I'll admit I have done C before, and it seems like overtrading to me. I believe there are some traders who use D with success, although it seems very risky.

Which would you choose? Or do you have another option?

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  #2 (permalink)
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I'd go for B.
You're a short term scalper so presumably your move should happen fairly quickly.
A is a problem because you get whacked for a big loss so you make a handful of good trades then take one big loss and you're back to zero again.
With C you could take the loss but as you say you risk losing twice if you reenter when price comes back. You could avoid that by saying you will only take one attempt at a trade. As a scalper presumably you see a number of setups per session so you wait for a new 'clean' setup.
D works well until it doesn't and then you really get whacked. You're using a large distance stop AND doing it with multiple size. In the current markets we have all seen moves that can slam one way much further than you think it would.
E can make sense, in that you wait for the final capitulation move before getting in, or wait for price to keep trying to go one way and eventually not be able to go any further. eg it keeps going down until it fails to attract anymore aggressive sellers so will need to move back up to a price that sellers are happy to come back in at.

I think your post pretty much sums up the dilemma every trader who has tried this for a while comes up with. I don't have any answers, I just believe in the end it is going to be different for everybody depending on their risk profile, account size, trading timeframe, psychology....and probably more. At least you are really thinking about the questions though and trying to work out what will be best for you.
Good luck.

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  #3 (permalink)
Saint Joseph
 
 
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matthew28 View Post
I'd go for B.
You're a short term scalper so presumably your move should happen fairly quickly.
A is a problem because you get whacked for big loss so you make a handful of good trades then take one big loss and you're back to zero again.
With C you could take the loss but as you say you risk losing twice if you reenter when price comes back. You could avoid that but saying you will only tale one attempt at a trade. As a scalper presumably you see a number of setups per session so you wait for a new 'clean' setup.
D works well until it doesn't and then you really get whacked. You're using a large distance stop AND doing it with multiple size. In the current markets we have all seen moves that can slam one way much further than you think it would.
E can make sense, in that you wait for the final capitulation move before getting in, or wait for price to keep trying to go one way and eventually not be able to go any further. eg it keeps going down until it fails to attract anymore aggressive sellers so will need to move back up to a price that sellers are happy to come back in at.

I think your post pretty much sums up the dilemma every trader who has tried this for a while comes up with. I don't have any answers, I just think in the end it is going to be different for everybody depending on their risk profile, account size, trading timeframe, psychology....and probably more. At least you are really thinking about the questions though and trying to work out what will be best for you.
Good luck.

Thanks Matthew. I agree on all those points. I agree B is likely the best. The challenge is the discretionary/subjective element of when to bail. My discretionary skills are best when it comes to profit taking, but this is something to work on. I believe to some extent we could boil the decision down to how many attempts did price make to move up/down, the time element, absorption, etc. but these estimates would likely have to change with the volatility. For example the time stop to bail would be shorter during high volatility days.

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  #4 (permalink)
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I agree, B seems the best, but like you said the execution can be very tricky. There are common scenarios where you'll end up taking a small loss multiple times in a row.

I am also very interested in looking at something else to help confirm the entry, so hopefully you're right on the 1st try. Have you ever looked into footprint volume analysis? I spent all weekend learning about it and back testing it, seems to have some confirmation ability.
dvrkbxy View Post
Thanks Matthew. I agree on all those points. I agree B is likely the best. The challenge is the discretionary/subjective element of when to bail. My discretionary skills are best when it comes to profit taking, but this is something to work on. I believe to some extent we could boil the decision down to how many attempts did price make to move up/down, the time element, absorption, etc. but these estimates would likely have to change with the volatility. For example the time stop to bail would be shorter during high volatility days.

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  #5 (permalink)
Saint Joseph
 
 
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planetkill View Post
I agree, B seems the best, but like you said the execution can be very tricky. There are common scenarios where you'll end up taking a small loss multiple times in a row.

I am also very interested in looking at something else to help confirm the entry, so hopefully you're right on the 1st try. Have you ever looked into footprint volume analysis? I spent all weekend learning about it and back testing it, seems to have some confirmation ability.

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Yes I use the footprint, I can confirm absorption with it that would otherwise be difficult to spot as it takes place over multiple prices. I'm still experimenting and learning with it but I do believe it is useful in some cases. As far as helping out in this particular scenario I'm not sure how I'd use it. I have my footprints set to color a price based on dominant volume, and to shade it darker based on specific thresholds of total volume at that price. So perhaps you might judge based on that information whether to scratch or not. You could say "I'll wait X minutes and if by that time I see more volume on the bid than the ask in this area, I will exit a long trade." So in this case yes it could just be a huge bid holding, but we're setting a standard that "we want to see buyers become aggressive in X amount of time or we're just out."

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  #6 (permalink)
New York City + NY/United States
 
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Do you think you could give me an example date and time for me to look at? A typical example of what you're talking about. I want to look at it from my perspective with my charts and see if I can see anything
dvrkbxy View Post
Yes I use the footprint, I can confirm absorption with it that would otherwise be difficult to spot as it takes place over multiple prices. I'm still experimenting and learning with it but I do believe it is useful in some cases. As far as helping out in this particular scenario I'm not sure how I'd use it. I have my footprints set to color a price based on dominant volume, and to shade it darker based on specific thresholds of total volume at that price. So perhaps you might judge based on that information whether to scratch or not. You could say "I'll wait X minutes and if by that time I see more volume on the bid than the ask in this area, I will exit a long trade." So in this case yes it could just be a huge bid holding, but we're setting a standard that "we want to see buyers become aggressive in X amount of time or we're just out."

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  #7 (permalink)
Saint Joseph
 
 
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planetkill View Post
Do you think you could give me an example date and time for me to look at? A typical example of what you're talking about. I want to look at it from my perspective with my charts and see if I can see anything

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I don't, I was just sort of thinking out loud. Just an idea for how I might manage a trade in the future, so I don't know a time where this proved valuable as I haven't put it into practice yet.

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  #8 (permalink)
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dvrkbxy View Post
So trade management is the skill that really makes a difference in our performance, but to manage a trade well, we have to at some point decide on what is the correct way to manage a trade in certain situations..
I can't really decide the proper way to manage a situation like this, and it runs through my head constantly... I think about this stuff all day it seems, so any input would be appreciated.

*for context, I consider myself a scalper, and the events I'm speaking of are short term moves*


matthew28 View Post
I'd go for B.
You're a short term scalper so presumably your move should happen fairly quickly.


dvrkbxy View Post
Thanks Matthew. I agree on all those points. I agree B is likely the best. The challenge is the discretionary/subjective element of when to bail.

I think I agree on B. The reason I say "I think" is that your options quickly became very complicated, and one thing I would say, especially for a scalper, is do not be complicated. Be simple. Too much thinking will kill even a swing trader who operates on a daily timeframe. It will murder someone who is very short-term, because there is no time for thinking. You need to be acting.

For instance, on your list of options, here are my quick comments:

A: "widen your stop, to give room for a stop run, and stay in the position" - No, don't widen your stop. This way leads to disaster, because you will always be letting yourself take bigger and bigger losses and justifying them. The point of a stop is to take a loss early, before it gets big -- so do this.

B: "decide this is taking too long, exit, and wait for a stop run to get in at a better price if the price action looks conducive." - I understand this to mean, get out if price doesn't do what you expect. I think this is a good idea. I don't do a "time stop," and would rather do a more simple price level stop, but "if price doesn't do what you expect, then leave" is a good idea. The one thing I have to say about this is that I would not give myself a lot of discretion here. I would first take a price stop and be out, and then decide what else to do. More on this below, in "C".

C: "let the market stop you out on a tight stop below your entry, see if it in fact does bounce back, and then re-enter (likely close to the same price you had before)" - Stops can be too tight, so there is sometimes a problem with them just because of that. If the reason you took the trade is still valid, it does make sense to get back in, but as a practical matter I find I usually am not using good judgment once I have been stopped out and find out I was "wrong." I will tend to do randomly unwise things after that point. One thing to always remember is the psychological aspect of trading, which simply means that our judgment gets warped very easily when winning and losing money are involved, and we need to protect ourselves from ourselves sometimes. I would use a price stop at a level that makes sense in terms of however you are reading the market, but not too tight, and would not generally jump back in if price went ahead in my original direction. There will be many good trades in the future, and there is no need to try to get every one, which will just have you running after trades a lot out of fear of missing out. It is not a big deal to miss out. There is always more.

D: "take the initial position, with a wide stop, and then ADD to your position when it shakes people out. (in this scenario you are buying weakness, anticipating that price will shoot up very soon)" - I think you will get slaughtered doing this. "Anticipating price will shoot up very soon" involves assuming a knowledge of the market that no one can have. Price will do whatever it wants to. There is also a problem with a too-wide stop, sort of the inverse of the too-tight stop: the too-tight stop gets you out when you shouldn't and you lose an opportunity, the too-wide stop gets you out later than you should, and you just lose. So balancing these can be a problem also.

E: "say hey you know what I'm ONLY going to enter when I see other traders getting shaken out, and pass on all of the "clean" pullbacks" - I am unable to comment on this, because I don't know how to tell if other traders are getting shaken out. As a price trader, I would be afraid to make any decisions about who is being shaken out, but would only look at what price is doing. This doesn't mean I don't think anyone can do it, just that I don't know how, and don't try. If your trading style/method lets you do that, then that's another matter. Maybe I simply didn't understand the option.

Back to my original point, the less complication you have in your thought process at the times of taking and exiting a trade, the better. Do not expect to make effortless and correct discretionary decisions while price is moving quickly and perhaps against you. Have your options laid out mentally ahead of time, and don't do much thinking in the moment of trading. Or, to simplify, if you're wrong, leave. Don't jump back in too soon, because there will be many more trades that will work for you in the future.

I hope this addresses you questions, and I hope you get your concerns answered, one way or another, if I didn't.

Bob.

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Great question and well defined options for dealing with it.

I have used every one of your possible responses at different times. I find I have an unparalleled skill at widening my stop and/or adding to my position at the worst possible time.

My guesstimate of when the pullback is done and people are shaken out is what gets me into the position in the first place, so waiting for them to *really* get shaken out doesn't work for me.

I'm with most everyone else. Option B.

GTFO and re-enter, MAYBE, when things become clearer.

Oh, and I have another unparalleled skill: giving up and bailing MOMENTS before a big move in my favor. Almost every day...

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  #10 (permalink)
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I am new to ES. I'm still doing paper trading. I see great potential all the time but didn't know how to capture any of those big moves.

So I read Barry Taylor's E-mini article. He said a stop of 4 points and a target of 4 points works well, 8 point movement. Use an OCO bracket. If one is fulfilled, the other order will be canceled. He said you need a wider stop to let ES find itself, and that a 4 point target is also realistic.

I was testing it all week. Worked well if you allow the 4-4 do the work. It takes a lot of the emotion and stress out of the trade.

Of course, sometimes it doesn't work. After all, no one's win/loss ratio is 100%. But that's where money management and resisting the temptation of emotional, revenge over-trading comes in.

I ran into trouble when I scalped manually. ES is way too treacherous for manual scalping. It will literally make your head explode if you follow all the ups and downs. Ultimately, the drawdown effect and revenge trading are the main reasons why I lost all the profit the 4-4 did for me. Money management and over-trading are also main problems.

I was trading 3 contracts. Even though I'm paper trading, I experience it as almost real. If I'm not making paper trading work, I sure as hell won't make live trading work.

But do try the 4-point stop loss and 4-point target. If you can control your gambling temptation, this system should get you some gains provided you keep your profits and don't trade anymore.

I found it possible for 3 contracts to make 1K with this system. Once again, I need to remind (myself especially) that once profit is attained, stop trading or risk losing it. Same thing with losers. Sometimes you just lose. Keep losses small.

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