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Practical trade management
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Practical trade management

  #1 (permalink)
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Practical trade management

I was rummaging around the site and found a comment by Big Mike that caused me to pause and reevaluate. He basically said that although trade management is important most beginners would be better off setting a target and a stop and then just walking away.
First I had to admit that I am still a beginner. I decided that you should have six months of profitable trading and six months of study to be beyond beginner. I am not profitable consistently, so I am still a beginner.
Then I looked at where most of my trading errors occur. It is absolutely in trade management that I am the weakest. Moving stops up to tight and crushing a strong trade. Or hanging on even if my exit signal appear so I loose more than I should. " Maybe it will come back. It could just be normal price fluctuation. There is a chance this trade can still work" Okay everyone needs to hear this at least once in their lives. " She's gone and she's never coming back. Get over it"
Seriously, I think that I would have been very clearly in the black if I had not tried to manage my trades. My entries are pretty good. Its me. I lost that money because I do not know enough yet to properly manage my trades.

So I have decided to just try a simple practical system. I am trading the ES. I am setting a 4 tick stop and a 6 tick target.

I will try it for a while and see how it works. I am actually quite enthusiastic about the idea. i will let folks know how it goes.

And even if it does not work, Thanks Mike.

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  #3 (permalink)
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mcteague View Post
I was rummaging around the site and found a comment by Big Mike that caused me to pause and reevaluate. He basically said that although trade management is important most beginners would be better off setting a target and a stop and then just walking away.
First I had to admit that I am still a beginner. I decided that you should have six months of profitable trading and six months of study to be beyond beginner. I am not profitable consistently, so I am still a beginner.
Then I looked at where most of my trading errors occur. It is absolutely in trade management that I am the weakest. Moving stops up to tight and crushing a strong trade. Or hanging on even if my exit signal appear so I loose more than I should. " Maybe it will come back. It could just be normal price fluctuation. There is a chance this trade can still work" Okay everyone needs to hear this at least once in their lives. " She's gone and she's never coming back. Get over it"
Seriously, I think that I would have been very clearly in the black if I had not tried to manage my trades. My entries are pretty good. Its me. I lost that money because I do not know enough yet to properly manage my trades.

So I have decided to just try a simple practical system. I am trading the ES. I am setting a 4 tick stop and a 6 tick target.

I will try it for a while and see how it works. I am actually quite enthusiastic about the idea. i will let folks know how it goes.

And even if it does not work, Thanks Mike.

Why 4 tick and 6 tick? That is very tight, you will need expert level timing to pull off such a thing. Much easier to trade a bigger chart and get outside the noise area or "rotational" area. Trade bigger charts on smaller size, not more risk. If you are already trading the minimum contract size (1) then the ES is too big for you. Trade spot forex instead or currency futures like M6E at a lower dollar value per tick, so you can trade a bigger chart with a bigger stop/target.

I would say you should triple the stop and target at minimum, but do not simply triple your risk by trading the same size. If you are trading 3 contracts today then trade 1 contract with 12 tick stop and 18 tick target. But if trading 1 car already, then ES is too big for you.

Stop: 12 ticks + C = 150 + 2.00 = $152.00 risk
Target: 18 ticks + C = 225 - 2.00 = $223.00 reward

That gives you a $35.50 expectancy per trade if you have a 50% win rate, you will need a 41% win rate to breakeven.

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Last edited by Big Mike; October 7th, 2013 at 11:59 PM. Reason: corrected type-o
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  #4 (permalink)
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I'm curious, what are your rules for entry and exit mcteague?

I think you are right about a year of trading. I went through a similar experience trading my first live account, I had no idea what I was doing though. It was awful. At least it had the benefit of smacking the arrogance out of me like a two by four to the forehead.

I have signed up for the Professional Trader Academy that Jeff Quinto does and he teaches starting out with a tight stop and target on sim . Trading with a four point stop can be frustrating to say the least.

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  #5 (permalink)
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Agree on the set it and forget it style, I do that all the time for all my swings, And I don't have to stay in front of the PC all day, or continuously checking on the market and my position. I am confident my orders are sitting at the exchange and don't even worry about my internet connection reliability or data feed, etc...

Listen to what big mike said, this is extremely important! Trade smaller position sizes on a larger time frames and set your stops and targets outside the regular noise range of your instrument to avoid whipouts. Check the ATR of your time frame of interest, it should give a good estimate on volatility and the stop distance that you should use.

As a very rough guide line, divide your capital in tenths and do not block more than 1/10th on a single trade. You can take several trades at a time if you wish, up to 4 simultaneous trades perhaps, but each trade remains a small position of 1/10th. Then set your stop in such a way not to lose more than 1% or 2% of your total capital. If the technical level on which you have to set your stop gives you a loss higher than 2% of your total account then skip the trade! it is not yours.

I keep targets to your discretion, this depend on your winning probability per trade as well, but perhaps a good starting point is something like 1.5x risk so if you risk 100$ let's say per trade (because your capital is 10,000$) then a target of 150$ would be great to start with. However, this shall as well follow correct technical levels, do not just set it arbitrarly based on dollar amount.
Again, if your technical level doesn't give you the potential of 150$ gain for the example above, then just skip the trade, it is not yours either!

Good luck with your endeavor

Successful people will do what unsuccessful people won't or can't do!
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  #6 (permalink)
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AlexB: I just have a few basic setups I wait for. My point really is that entries and exits are not the hard part of trading. As far as my rules I will give you 2.

Entry rule: Avoid buying at market. Once your indicators give you the sign place place your entry just past the nearest resistance point. (some price point not to far away) We want price to come to us. And we want it to come with sharp momentum.

Exit rule: If a bar closes below the low of the previous bar Exit immediately.

Mike and Fadi: This stop and target might be a little to tight. I will reevaluate it One of the problems for beginners is that I am trying to learn and test things at the least possible cost. This can sometimes lead to inaccurate choices like having stops that are to tight because you think this saves you money. But I know that I have to pull back and look at it objectively. Realize thought that your approaches show an advanced understanding that I do not have yet. But I can still use your ideas to improve my trading now.

From a psychological standpoint I find wide stops difficult. At the moment when I trade the ES I usually use a default 2 point stop. I do not like being down. And I like to win everyday. Or at least to limit my downside.

If you have trade setups that are good 75% of the time ( This by the way is remarkably high. Much higher than practically any wagering (gambling) vehicle you can name) This still means 25% of your trades will be losers. And that means that there will be days when you will have more than one. And they may come together. Using wider stops you could easily be down 10, 15, or 20 points. This does not make me happy.

So I just hate the feeling of being down a lot. I think it is very difficult to climb back up in the same trading session. And I just do not like the way it feels. But then again maybe I am limiting myself by short term thinking. Something else to think about.

I am not always sure that the stops suggested by some indicators, although probably correct, can provide the correct risk reward ratio. I mean that the actual target you hit and frequency of winners may not justify the wider stop from a strictly probabilistic perspective

Anyway thanks for the comments and advice. I will think more about this.

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  #7 (permalink)
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The last two days were disasters. But that had little to do with this idea. Well a little. But I will get to that later.
I decided to kind of take Mikes advice and widened things a bit. I used to always trade with a 2 point stop using a 5 minute chart. I just figured that that was enough to know you were wrong. My plan to change to a 4 tick stop was just to tight. My timing would almost have to be perfect. And I would almost always be inside of the ATR so all noise would have stopped me out. It was just a bad idea. So I will not have super wide stops. mostly the 2 to 3 point range. And if the the ATR is wider than that without a clear trend in my direction, I should probably be out anyway.

However the main thing I was trying to correct was how to manage the trade when it gets into the money. When it is profitable. You know, I would jump in an trail behind price to protect my profit. But it was just done badly and I cut my own upside. So I am also widening out my targets just a bit. Well mostly I am just not touching things until my indicators tell me to. If my entries are good I should not have to try any thing to fancy. I am just going get out of my own way.

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mcteague View Post
The last two days were disasters. But that had little to do with this idea. Well a little. But I will get to that later.
I decided to kind of take Mikes advice and widened things a bit. I used to always trade with a 2 point stop using a 5 minute chart. I just figured that that was enough to know you were wrong. My plan to change to a 4 tick stop was just to tight. My timing would almost have to be perfect. And I would almost always be inside of the ATR so all noise would have stopped me out. It was just a bad idea. So I will not have super wide stops. mostly the 2 to 3 point range. And if the the ATR is wider than that without a clear trend in my direction, I should probably be out anyway.

However the main thing I was trying to correct was how to manage the trade when it gets into the money. When it is profitable. You know, I would jump in an trail behind price to protect my profit. But it was just done badly and I cut my own upside. So I am also widening out my targets just a bit. Well mostly I am just not touching things until my indicators tell me to. If my entries are good I should not have to try any thing to fancy. I am just going get out of my own way.


Well, the 5min ES Dec'13 chart has something like 1.5 points of ATR these days; so a safe stop, based on this approach, would be 3pts or 4.5 pts not less.
When you are in a trade, and which to trail your stop, you shall keep away from highest price by that amount too, otherwise you lose ally our account being stopped out.

Remember one thing: running stops, and doing fake moves to take out the stops above or below key technical levels is the institutions and money maker's favourite game of all times!
Don't let them ruin you while they play and have fun with their colleagues at work...

Successful people will do what unsuccessful people won't or can't do!
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