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

  #71 (permalink)
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monpere View Post
In the 'Systematic Trading with MultiCharts' futures.io (formerly BMT) webinar yesterday, the main trader from M3 Financial hedge fund summarized that this is exactly how he trades. He trades multi million dollar accounts, building large positions of 10's of thousands of contracts by continually adding to positions as the markets goes against him until he gets to his intended maximum position size. He says he has 140% returns. This style of trading can work when you have those kinds of resources.

I agree can work with those kind of resources as well as longer time frames. Longer time frames beyond day give time needed to move back in favor.

Leads to another good point. Matching your strategy to your resources. Some strategies are much more resource intensive than others.

I think this type of strategy in a black swan event is where some of the hedge funds get wiped out. But usually result of over leveraging those resources. Also much easier for a hedge fund to to take that kind of risk with other peoples money.

"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."

Last edited by liquidcci; August 5th, 2011 at 10:35 AM.
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  #72 (permalink)
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Tight stop or not, it does not matter.

If your stop is 1 point and take profit 100 then without edge and commissions you will loose 99 times per one win (we assume position sizing is always the same). If your stop is 100 points and take profit 1 point, you will win 99 times in a row before you wipe every of your wins with one loss. I've done simulation of it and I am more than sure that this is the way it is. Given you have no edge and do coin flip and that there are no commissions, in the end, you have just as much money as in the beginning.

I also took a certain sysem and varied take profit. The larger take profit, the less times you win. In the end, it really does not matter (the performance is almost identical).

There are, however, hundreds of other exit criteria and not only risk to reward. Like for example is price goes back to middle of the keltner channel and closes you close the trade (sort of a trailing stop). For those who hold positions for years trailing stop is the only way to go. Then you can get those nice moves in gold etc... Scalpers obviously don't trail (or I find it useless to do so.)

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  #73 (permalink)
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ReaM View Post
Tight stop or not, it does not matter.

If your stop is 1 point and take profit 100 then without edge and commissions you will loose 99 times per one win (we assume position sizing is always the same). If your stop is 100 points and take profit 1 point, you will win 99 times in a row before you wipe every of your wins with one loss. I've done simulation of it and I am more than sure that this is the way it is. Given you have no edge and do coin flip and that there are no commissions, in the end, you have just as much money as in the beginning.

I also took a certain sysem and varied take profit. The larger take profit, the less times you win. In the end, it really does not matter (the performance is almost identical).

There are, however, hundreds of other exit criteria and not only risk to reward. Like for example is price goes back to middle of the keltner channel and closes you close the trade (sort of a trailing stop). For those who hold positions for years trailing stop is the only way to go. Then you can get those nice moves in gold etc... Scalpers obviously don't trail (or I find it useless to do so.)

So you are essentially saying stop does not matter that no matter what you end up the same? What?

"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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  #74 (permalink)
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Exactly. If you for example decide to double your stop loss. For example from R:R 1:1 to 2:1. Then your win ratio will be 66.66% and loss ratio 33.33% instead of 50/50%.

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  #75 (permalink)
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ReaM View Post
Exactly. If you for example decide to double your stop loss. For example from R:R 1:1 to 2:1. Then your win ratio will be 66.66% and loss ratio 33.33% instead of 50/50%.

That is not true and way over simplifying reality. You cannot make that kind of exact correlation. Not sure what you are using to test but it is not giving you correct results. The market is not that finite.Just because you go from 1:1 to 2:1 does not mean your win ratio will be 66.6%. Your win ratio will be what the market gives not what you decide it will be.

"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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  #76 (permalink)
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liquidcci View Post
That is not true and way over simplifying reality. You cannot make that kind of exact correlation. Not sure what you are using to test but it is not giving you correct results. The market is not that finite.Just because you go from 1:1 to 2:1 does not mean your win ratio will be 66.6%. Your win ratio will be what the market gives not what you decide it will be.

I must say I did not understand either of your four sentences. But I'll explain further.

Imagine you are using the coin flip system (R:R 1:1). After many many trades. I am talking ten thousand trades, it will be so that you have exactly as much money as you started with, given that there are no commissions. Since there are commissions in real world, you will end up blowing your account, because coin flip has no edge. It might have abnormally many heads in a row and one might be profitable with a coin flip like system for some time, but soon it will be over.

Most people who are making money in markets are simply having those rare heads in a row and they are super profitable during a few years but soon things will change and the will lose everything. All (I claim all) of the system you usually find on the web are coin flip systems. They have no edge. Very small percentage of traders make money, because they can. The rest are just vistims of a normal distribution of profits with some having luck others not.

I can back up all of my words with example but for time reasons, I won't. Neither do I have to prove anything here. You can use matlab and simulate something like that. Or you can write a bot and let it make thousands of trades on real historical data.

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  #77 (permalink)
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ReaM View Post
I must say I did not understand either of your four sentences. But I'll explain further.

Imagine you are using the coin flip system (R:R 1:1). After many many trades. I am talking ten thousand trades, it will be so that you have exactly as much money as you started with, given that there are no commissions. Since there are commissions in real world, you will end up blowing your account, because coin flip has no edge. It might have abnormally many heads in a row and one might be profitable with a coin flip like system for some time, but soon it will be over.

Most people who are making money in markets are simply having those rare heads in a row and they are super profitable during a few years but soon things will change and the will lose everything. All (I claim all) of the system you usually find on the web are coin flip systems. They have no edge. Very small percentage of traders make money, because they can. The rest are just vistims of a normal distribution of profits with some having luck others not.

I can back up all of my words with example but for time reasons, I won't. Neither do I have to prove anything here. You can use matlab and simulate something like that. Or you can write a bot and let it make thousands of trades on real historical data.


Not asking you to prove anything. But your statements make no sense in regards to this conversation. I am not trying to be rude and offend you. The conversation was not about not having an edge. Having an edge is implied. I agree you need an edge. The conversation is in regard to where you put your stop which does have an effect on a system. I have traded for many years and well understand the coin flip. Kind of 101.

I think we may just have a failure to communicate here.

"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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  #78 (permalink)
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It does. I state that stop loss placement don't matter. For a certain system they of course do.

But what I am trying to disprove: there is no reason tight stop loss won't work. Because it works just like any other stop loss.

I am actually (for myself) a living proof that a stoploss of less than 5 pips on EURUSD works. The author of the thread has absolutely nothing to back his opinion up with and I do.
Yeah, I expanded the subject a lot further without a need.

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  #79 (permalink)
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ReaM View Post
Tight stop or not, it does not matter.

If your stop is 1 point and take profit 100 then without edge and commissions you will loose 99 times per one win (we assume position sizing is always the same). If your stop is 100 points and take profit 1 point, you will win 99 times in a row before you wipe every of your wins with one loss. I've done simulation of it and I am more than sure that this is the way it is. Given you have no edge and do coin flip and that there are no commissions, in the end, you have just as much money as in the beginning.

This is likely true with random entries. As I see it the primary function of exits (as I mentioned earlier) is to establish a favorable relationship between the size of the average winner and the size of the average loser. The primary function of entries is to choose a spot where the market is more likely to move to your target than your stop. In other words, to influence winning percentage.

Hopefully people who are trading with real money have an entry system that performs better than random entries. You may be right that most traders on the internet cannot do better than random entries, but I personally think it's not that hard to find a tradeable edge. The problem instead is that most people cannot tolerate the drawdowns that come even with a tradeable edge, and quit while they're behind.

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  #80 (permalink)
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ReaM View Post
It does. I state that stop loss placement don't matter. For a certain system they of course do.

But what I am trying to disprove: there is no reason tight stop loss won't work. Because it works just like any other stop loss.

I am actually (for myself) a living proof that a stoploss of less than 5 pips on EURUSD works. The author of the thread has absolutely nothing to back his opinion up with and I do.
Yeah, I expanded the subject a lot further without a need.

In a word....no.

If you were to place your stop loss at 1 tick, your strategy would get absolutely slaughtered, I don't care what your profit target value was.

This is very dependent on the instrument, but it's nearly impossible to repeatedly find entries on an instrument like oil that do not retrace at all. That would mean you'd have to find localized tops, bottoms and harsh runs, where the price does not retrace at all, otherwise your trade is exited at a loss.

The size and forgiveness of your stoploss is directly related to the proficiency of your entry (and the instrument and it's volitility).

If you had perfect entries, then you wouldn't need a stop loss at all, as your trades would never drawdown against you. Obviously, not only is that not likely, it's ridiculous.

Most traders have difficulty entering at optimal market points, CONSISTENTLY and over a wide range of market conditions. This is the reason that being flexible and able to manage exits is so crucial....because most of us can't get it right all the time.

That was one of Liquids original points, I think is the most important. That even if you were to "get it right" with respect to your entry 90% of the time, that 10% that your entries struggle (with a tight stop) is going to result in an excessive drawdown.

Drawdowns is what's responsible for a blowout. It's also the lagest factor in how much your strategy can compound or put your available capital to work for you.

"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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