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

  #31 (permalink)
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trendisyourfriend View Post
You must have read me wrong or Algos must be poorly designed as i do not get stopped out that often specially if my position is backed by volume at price or a nice balance area. My stop on the ES is no more than 1.5/2 points, Nasdaq no more than 2/3 points and TF around 6/12 ticks. I trade in that range for my stop losses.

So i repeat my question, we are in a down trending market, price bounce off a MA which has been holding quite well. I place my stop above the swing that just kissed that MA. What the hell is wrong with that (see chart)
?

Don't take it personally, my trendisyourfriend. I was just making the generalization that most retail traders and amateurs place their stops at obvious levels, place them too tightly, or trail them too tightly, which make them prone to getting stopped out frequently. You, on the hand, appear to have avoided the problem, through intelligently thought out placement.

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  #32 (permalink)
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Like I've said a 1000 times, there are very few hard, fast and irefutables in trading. What's a disaster for one person, might be a saving grace for another. There's tons of inputs/outputs and dynamics that go along with the discussion of any aspect of trading management and strategy.

Having said that, if it works for guys like Monpere, then great. Stick with it. I tip my hat to you.

I used to trade off hours on CL, because I thought it was more tame. I'd trade very early morning US into early European RTH.

Even then, it seemed like every once in awhile, any sudden order would swoop in like a seagull at a picnic and just isht all over my plans (with small/tight stops). The most frustrating thing in the world is to watch your tight stop get violated, only to watch the market continue in the direction and past what would have been your target.

The operable question becomes.....do the number of times that happens on an instrument like CL (where your tight stop is victimized, only to see a continuation that would have been profitable).......outweigh the number of times that a more forgiving stop would have been touched.

In essence, if you increase your risk tolerance, does the number of losers (multiplied by the additional risk) overshadow the number of trades that end up winners/profitable?

IF, you're somehow stone cold and emotionless enough to re-enter the trade (after being stopped out) then I guess that question gets altered. I could do this paper trading, I couldn't bring myself to do green trading. The stop out totally wrecked my plan and it was daunting to simply jump back in. FURTHERMORE, if that is the case, if you're literally re-entering a trade, I don't see the difference in that and simply relaxing your stop a little more.

Secondly, as Monpere admitted, his system is almost ENTIRELY based upon entry. To those that can do it, my hat goes off to you. I find that entry centric systems tend to be very market centric. That is to say, you tear it up during certain market types, but get destroyed during others. So the natural progression would be to try to determine what kind of overall market structure is present, and then employ the best entry method possible. NOT an easy task, particularly for the less experienced.

Thirdly, on an instrument like CL, fundamentals get a vote, and a significant one at that. I've seen some Wild West type scenarios (as have many of you) where the market was telling everyone one thing, only for some sudden news to arrive and totally blow your plan and methodology out the window.....this happens QUITE often on an instrument like CL.

So, a word of caution to the newly trading and inexperienced....if you're going to employ tight stops and an entry centric system on an instrument like CL...

You're going to have to be able to:
A) Correctly diagnose the overall market structure and what type of day/market it is (trending, sideways, etc).
B) Correctly develop entry signals/strategies that cater to each type.
C) Avoid fundamental news impacts which happen weekly (Petrolium status reports, Jobs numbers, Unemployment reports, Fed announcements, Greek Bailout votes, Japanese Earthquakes, Egyptian political upheavals, Lybian revolutions, etc, etc, etc)
D) Have the stone cold capability of varying positionsize and doing daredevil feats like doubling down the other direction (after a stop) re-entering after stops, etc.

Pinpointing a place in the market where oil will move 8 ticks one direction before it moves 4 ticks in the opposite direction is pretty difficult to do....doing it consistently and repeatedly is VERY difficult.

In order JUST to break even, you'd need to win at least 38% of the time ($75 win, $45 loss) and that doesn't even include slippage.

To net 10 ticks a day on CL: (again, this is ZERO slippage)

At 40% win rate, you'd need to make at least 33.333 trades per day
At 50% win rate, you'd need to make at least 7 trades per day
At 66% win rate, you'd need to make at least 3 trades per day
At 75% win rate, at least 2.25 trades a day
At 90% win rate, at least 1.75 trades a day

As you can see, even if you win 75% of the time, you still need to average over 2 trades a day, and that's not including slippage. (this is with a goal of 10 ticks/day).

How many opportunities to win 8 but risk 4 will you see in a day (at a 75% win rate?)

I'm not saying it can't be done, but I'm saying it's VERY difficult to do.

"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
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  #33 (permalink)
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Lornz View Post
I agree. But there are not that many scalpers left... If you have an approach that works for you, that's great. I doubt many are able to trade CL with 4 ticks stop, and over time I find it hard to believe one would be able to pinpoint an entry that precisely, even with such small targets... But if you do, that is quite remarkable!

CL has countless gyrations of 40 ticks or more, it usually has a 100-tick move or two. It has limited liquidity and slippage can be a problem, so it makes sense to go for larger targets and ride the waves you can. I would argue that you are leaving way to much money on the table.... I'd rather take fewer trades with larger targets, I prefer to lean back while trading...

Can I ask how many trades you have a day? And your win rate?

On the CL, I get around 40 to 50 signals per day, I generally trade the first 10 to 20, then quit for the day. I almost never am still trading past noon. Here's a chart of my method. I started testing RJay's bars yesterday with my autotrader. It uses the same method and indicator I use in my live trading. I don't autotrade in my live trading as the indicator is not that accurate yet. But you can see that my entries are designed to be at the apex of a swing, and my stop goes right behind the entry bar.

https://futures.io/vendors-product-reviews/12224-innovative-trading-solutions-online-com-review-2.html#post141873

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  #34 (permalink)
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Surly View Post
I've heard people say this before as well and I've actually never understood it. I wonder if there is any statistical/mathematical argument that can distinguish between entry optimization vs. exit optimization? To me, entries and exits are simply adjustments in your relative exposure - an "exit" is simply an "entry" into a flat position. Whereas an "entry" is simply an "exit" from a flat position.

I'm curious to hear more about this.

From my perspective, exits and entries are quite different in function. Entries are akin to an "educated guess" about what the market might do under a given set of circumstances. Exits are the means of directly influencing the return of the trade after you've made the guess. You control the profitability of the system by controlling the relationship between losses on losing trades and profits on winning trades, and you do that through the exit logic.

Imagine the difference between a system that uses random entries with a carefully designed exit logic, versus a system that uses carefully designed entries but random exits.

I posit that it would be possible (not necessarily easy) to make money with the former system. If you use some kind of trailing stop system that keeps losses small but allows winners to run, you'd have at least a fighting chance of controlling the returns of the system even with random entries.

A random exit is different and in my view almost nonsensical. How can you control the profitability of a system if you don't have a way of limiting losses or influencing the size of wins versus losses? One trade stops out for a 5 tick loss; another under identical conditions stops out for a 100 tick loss. If exits are random then the profitability of the system is random.

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  #35 (permalink)
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worldwary View Post
From my perspective, exits and entries are quite different in function. Entries are akin to an "educated guess" about what the market might do under a given set of circumstances. Exits are the means of directly influencing the return of the trade after you've made the guess. You control the profitability of the system by controlling the relationship between losses on losing trades and profits on winning trades, and you do that through the exit logic.

Imagine the difference between a system that uses random entries with a carefully designed exit logic, versus a system that uses carefully designed entries but random exits.

I posit that it would be possible (not necessarily easy) to make money with the former system. If you use some kind of trailing stop system that keeps losses small but allows winners to run, you'd have at least a fighting chance of controlling the returns of the system even with random entries.

A random exit is different and in my view almost nonsensical. How can you control the profitability of a system if you don't have a way of limiting losses or influencing the size of wins versus losses? One trade stops out for a 5 tick loss; another under identical conditions stops out for a 100 tick loss. If exits are random then the profitability of the system is random.

Come on, in the real world they would both bleed money. Superlative analogies seldom make convincing arguments.

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  #36 (permalink)
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monpere View Post
Come on, in the real world they would both bleed money. Superlative analogies seldom make convincing arguments.

There was an article in Active Trader testing a swing trading methodology that used random entries with a trailing stop exit system. Didn't perform as badly as you might expect. Let me see if I can track that down.

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  #37 (permalink)
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Let me add to this, as I think it's a really important point.

Most traders lose money, and in my view it's not because they're picking the wrong places to enter but rather because they handle exits the opposite way that they should.

There is a natural human instinct for some reason to book profits early while letting losses run in a vain hope that the trade will "turn around." I'm not really sure why this is but I think it has to do with a desire to be "right" (you lock in the profit while it's there, because if it reversed and turned into a loss that would mean you were wrong), combined with a belief that a loss isn't "really" a loss until you close it out.

It's obvious to experienced traders that this is a philosophy that's doomed to fail, and it's doomed to fail regardless of where the trades are entered. If you took the exact same set of entries and flipped the exit logic -- kept losses small while giving winners room to run -- then you'd have a completely different return profile. You might win, you might not (depending on how tight you kept the stops in relation to the volatility and noise in the instrument you're trading) , but you're at least not guaranteed to lose.

Every successful trading system is successful in my view because it helps the trader overcome this natural instinct to botch exits. That's not to say that entries aren't important as well, but they're not as directly correlated to system return as exit logic is.

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  #38 (permalink)
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worldwary View Post
Let me add to this, as I think it's a really important point.

Most traders lose money, and in my view it's not because they're picking the wrong places to enter but rather because they handle exits the opposite way that they should.

There is a natural human instinct for some reason to book profits early while letting losses run in a vain hope that the trade will "turn around." I'm not really sure why this is but I think it has to do with a desire to be "right" (you lock in the profit while it's there, because if it reversed and turned into a loss that would mean you were wrong), combined with a belief that a loss isn't "really" a loss until you close it out.

It's obvious to experienced traders that this is a philosophy that's doomed to fail, and it's doomed to fail regardless of where the trades are entered. If you took the exact same set of entries and flipped the exit logic -- kept losses small while giving winners room to run -- then you'd have a completely different return profile. You might win, you might not (depending on how tight you kept the stops in relation to the volatility and noise in the instrument you're trading) , but you're at least not guaranteed to lose.

Every successful trading system is successful in my view because it helps the trader overcome this natural instinct to botch exits. That's not to say that entries aren't important as well, but they're not as directly correlated to system return as exit logic is.

I got called amaeturish for revealing that some pretty interesting strategies I've developed came by way of testing a strategy and discovering that not only did it fail, but failed miserably. By simply reversing the polarity, now it's profitable, and considerably so. The swap is always less pronounced (as slippage and commissions always work against you) but even still.

I once had a friend who blew through $45k while trading stocks in the course of about 4 months. At one point, he picked like 7 losers in a row. I SERIOUSLY thought of shadowing his trades in the opposite direction at one point....

But you're correct, to the amateur and casual observer, they'd proclaim "even a monkey with a dart board could get better results" but the reality is....his failures had more to do with poor exits than poor entries.

I told him, if you liked a particular stock/company and bought it, because you thought it was solid, and it turns against you immediately after buying it....then before you just bail out, ensure that you're opinion of the company has changed. If it's still a solid company, then stick with it. Inevitably, he couldn't stand the heat and he would bail, only to watch it come back in a couple of weeks or months....and go considerably higher.

As I said in numerous other threads....unless your entries are just terrible....even with a neutral edge, every trade will yield SOME amount of runup. It's very rare to see a trade with no runup. If you apply even a slight edge, that probability dimishes even further.

So the easiest trick is simply raking what the market will give you on each trade....and recognizing when the trade is willing to give you more.

"never cut a winner short....give them time to develop. Never add to a loser....cut your losses and move on. The ability to recognize the difference is what separates billionaires from bankruptcies."

"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
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  #39 (permalink)
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monpere View Post
Ok, I'm gonna throw a wrench in this large stop love fest. You have to qualify your statements with the style of trading you do, and what generally works for that style. I have traded the CL every day with a fixed 4 tick stop fixed 8 tick target. Yes, in this approach the entry is absolutely paramount. I don't believe stops should ever be chosen arbitrarily, they should be chosen based on market principles. My stops can be 4 ticks because I am trading the peaks of small swings. If I am entering at the close of the 4 range bar at the apex of a swing that will move 12 ticks, then with a target of 8 ticks, there is no reason for my stop to be much greater then the size of the 4 tick range bar that I am getting in on.

The notion that a 10 tick stop is too small for CL is outrageous if your trading style does not require it. If you need the market to move 30 ticks to get a 2:1 trade, then yes your stop has to be 15 ticks, but not if you only need 8 ticks for a 2:1 trade. I know my trading style is in the minority, but it proves that the generalized statements about stops do not always hold true, it all depends on your trading method.

monpere you make an important point that I did not clarify in my op. Stop placement is relative to target placement and I optimize that area from a system perspective. So each system will be different and a wide stop when you are going for an 8 tick target could present major problems. We each define wide in different ways so maybe a more accurate way to look at this is placement relative to target. In other words what I would call a tight stop on my system may be a wide stop on yours because the targets are different. Thanks for bringing this into the conversation because it is valid.

"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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  #40 (permalink)
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Now here is another thought into the stopfest. Trailing stops and breakeven stops can also give you false comfort. I am not saying they are not valid. On some systems they can make difference between winning and losing. However, should never have them in place just because they make you feel better emotionally.

For a long time I felt like I just had to have a BE stop. Made me feel better when I was in a trade and it got to BE. Now all the pressure was off. But when I really started looking at my system numbers using a BE reduced my profit in a significant way unless it was triggered relatively close to my target. It also increased my draw downs. If I set trigger fairly close to my target lets say 10 ticks it did not reduce profit much but did not increase it either so was statistically insignificant. So I just did away with any trail or break even.

This is not meant to be a blanket statement against using a BE or trail as I may use them on future systems. Point is don't use them to give comfort. Only use them because your back and forward test tell you it makes your system better. Some systems benefit and others do not.

That is really what this thread is about. Traders often do things that give them a "false comfort" that actually hurt profitability. We must throw out the need for crutches and look at the numbers as they are developing our strategies based on stats not what makes us feel better on a trade by trade basis.

"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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