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Tight Stops can give false comfort
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Tight Stops can give false comfort

  #101 (permalink)
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Profit VS Breakeven

A friend of mine did a study on how moving stop loss to break-even at certain point did affect your overall profitability and accuracy.

This study is done on currencies, but it wouldn't surprise me if the the results would have same curve on different market.

The line with small yellow triangles shows the accuracy while the bars shows profit. BreakEven value shows the amount of pips (ticks). Its clearly visible how the accuracy and the overall profitability increases as the break-even value increases up to a certain point. From a 5-pip BE value, showing a detrimental effect, towards the optimal level of 60-65 pips BE, your accuracy quadruples and the profit doubles.

The curve is strategy specific but the shape could to some degree be applied to many systems.

"We may not be able to control the wind, but we can always adjust our sails"
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  #102 (permalink)
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When does a bad trade become a bad trade?

This has always been my problem when dealing with stops. I understand the concept of giving the trade room to breathe and I understand the point of protecting a good trade from the inevitable stop runners we all fall victim to, but, at what point (in ticks) is a bad trade a bad trade? When (in ticks) do you have to admit you made a mistake. There is a guru out there who doesn't set stops he just kills the trade if it doesn't move in the right direction immediately. That's pretty extreme but I see his point. If you're right you should start seeing results before you go deep into the red. I trade the TF exclusively ($10 ticks) and have tested 10 tick stops (bad) 15 ticks (50/50 at best) 20 ticks (OK) 25 ticks (better but the absolute most I am willing to risk on 5 contracts). I have used 20 but I still get real queasy when it moves into that 15-20 territory. Risk/Reward ratios never enter my mind. Lately I have not been setting stops just keeping my eye on the P/L box and hitting the kill switch when I get real uncomfortable. This has been working for the most part but I'm still not happy.

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  #103 (permalink)
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turkmay View Post
This has always been my problem when dealing with stops. I understand the concept of giving the trade room to breathe and I understand the point of protecting a good trade from the inevitable stop runners we all fall victim to, but, at what point (in ticks) is a bad trade a bad trade? When (in ticks) do you have to admit you made a mistake. There is a guru out there who doesn't set stops he just kills the trade if it doesn't move in the right direction immediately. That's pretty extreme but I see his point. If you're right you should start seeing results before you go deep into the red. I trade the TF exclusively ($10 ticks) and have tested 10 tick stops (bad) 15 ticks (50/50 at best) 20 ticks (OK) 25 ticks (better but the absolute most I am willing to risk on 5 contracts). I have used 20 but I still get real queasy when it moves into that 15-20 territory. Risk/Reward ratios never enter my mind. Lately I have not been setting stops just keeping my eye on the P/L box and hitting the kill switch when I get real uncomfortable. This has been working for the most part but I'm still not happy.

Stops do not necessarily have to come from the price series of the instrument you're trading, or even be measured in price...


Last edited by Lornz; August 27th, 2011 at 01:41 PM.
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  #104 (permalink)
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Lornz View Post
Stops do not necessarily have to be come from the price series of the instrument you're trading, or even be measured in price...

Stops can come from the price serie of an other instrument, why not, but I don't see how it can be measured in an other way that price serie.

I guess you suggest it can come from volatility, but volatility is a mere transformation of price series.

Did you mean something else ?

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  #105 (permalink)
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turkmay View Post
This has always been my problem when dealing with stops. I understand the concept of giving the trade room to breathe and I understand the point of protecting a good trade from the inevitable stop runners we all fall victim to, but, at what point (in ticks) is a bad trade a bad trade? When (in ticks) do you have to admit you made a mistake. There is a guru out there who doesn't set stops he just kills the trade if it doesn't move in the right direction immediately. That's pretty extreme but I see his point. If you're right you should start seeing results before you go deep into the red. I trade the TF exclusively ($10 ticks) and have tested 10 tick stops (bad) 15 ticks (50/50 at best) 20 ticks (OK) 25 ticks (better but the absolute most I am willing to risk on 5 contracts). I have used 20 but I still get real queasy when it moves into that 15-20 territory. Risk/Reward ratios never enter my mind. Lately I have not been setting stops just keeping my eye on the P/L box and hitting the kill switch when I get real uncomfortable. This has been working for the most part but I'm still not happy.

Stop thinking in ticks. +50 ticks on a trade is irrelevant, if the market had to go -90 ticks against your first before getting there, and you only felt comfortable with -20 ticks in the red. The market does not care about ticks. There are no market laws that says that the TF must move x number of ticks before moving back x number of ticks. You are setting your stops at points that make you feel comfortable. The market does not care about your comfort. If your entry is based on a market principle, then your stop has to be based on where that principle no longer holds true. It you are uncomfortable with the place where that will happen, then you should not be in that trade.

If you are trading pullbacks, then your stop should be placed at the point where no matter what the market does, price will no longer be able to form a pullback anymore (according to your definition of a pullback). If you are trading break outs, your stop should be at the point where the price structure can no longer form or remain a break out. Every pattern starts out looking like what you define it as, but that formation may disintegrate in the process, the moment and the place where that happens is where you should be getting out of the trade. You should know where that place will be ahead of time. If that projected location is too large for your account, your method or your comfort, then you should not be in that trade. That projected location decides it the trade is go, or a pass.

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  #106 (permalink)
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TheTrend View Post
Stops can come from the price serie of an other instrument, why not, but I don't see how it can be measured in an other way that price serie.

I guess you suggest it can come from volatility, but volatility is a mere transformation of price series.

Did you mean something else ?

Time...

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  #107 (permalink)
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In simulations I've run, tightening the stop actually increases the drawdown and limits PnL significantly. Wide stops = smoother returns and more lee-way to let the trade run. However on the flip side, without knowing your downside risk you have no way to position size / exit a trade if you're going wrong ...

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  #108 (permalink)
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aediaz1 View Post
A friend of mine did a study on how moving stop loss to break-even at certain point did affect your overall profitability and accuracy.

This study is done on currencies, but it wouldn't surprise me if the the results would have same curve on different market.

The line with small yellow triangles shows the accuracy while the bars shows profit. BreakEven value shows the amount of pips (ticks). Its clearly visible how the accuracy and the overall profitability increases as the break-even value increases up to a certain point. From a 5-pip BE value, showing a detrimental effect, towards the optimal level of 60-65 pips BE, your accuracy quadruples and the profit doubles.

The curve is strategy specific but the shape could to some degree be applied to many systems.

A breakeven helping your equity curve can depend on market trading, strategy, original stop and target placement etc... I find on TF breakeven can help but is highly dependent on my target.

I find on CL which is what mostly trade that using a breakeven will cut my profit in half. I can put the trigger pretty close to my exit target and it will not have an effect either way. Point being I get much better results by not using a breakeven or a trail.

"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."
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  #109 (permalink)
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liquidcci View Post
A breakeven helping your equity curve can depend on market trading, strategy, original stop and target placement etc... I find on TF breakeven can help but is highly dependent on my target.

I find on CL which is what mostly trade that using a breakeven will cut my profit in half. I can put the trigger pretty close to my exit target and it will not have an effect either way. Point being I get much better results by not using a breakeven or a trail.

That has also been my experience so far, in terms of break even and trails. In all the methods I have personally tried, full stop/full target has always performed better for me... But then again, being a scalper, it may just be a side effect of the scalping setups that I generally trade. I suspect there might be an equilibrium point where the results may flip, based on how far your targets are from your entry.


Last edited by monpere; August 27th, 2011 at 03:28 PM.
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  #110 (permalink)
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aediaz1 View Post
A friend of mine did a study on how moving stop loss to break-even at certain point did affect your overall profitability and accuracy.

This study is done on currencies, but it wouldn't surprise me if the the results would have same curve on different market.

The line with small yellow triangles shows the accuracy while the bars shows profit. BreakEven value shows the amount of pips (ticks). Its clearly visible how the accuracy and the overall profitability increases as the break-even value increases up to a certain point. From a 5-pip BE value, showing a detrimental effect, towards the optimal level of 60-65 pips BE, your accuracy quadruples and the profit doubles.

The curve is strategy specific but the shape could to some degree be applied to many systems.

Thanks for sharing, but I'm having a hard time following. Perhaps you can list three or four example trades including the stop loss and profit target for each, and at what point you move to breakeven.

I guess I tend to think in terms of what I call "efficiency", which is how much of the MFE I closed on the trade. If MFE is 100 ticks, and I exited the trade at 50 ticks, that is 50% efficiency. So I have a hard time understanding what you've posted because it is missing pieces of the puzzle.

Mike

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