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Very good insight and discussion. My opinion is along the lines of....... If I make 3 trades and have a pre-determined stop of 10 ticks, and I refuse to move it until the trade moves in my favore 10 ticks, and by sticking to that no matter what, and it leads to 3 stop outs in a row, the next trade I'm in ( just to put me at Breakeven , plus the cost for 2 ticks of slippage per trade , plus the costs for commission on each of the 4 trades ) would mean that, I need the next trade to move 8 points for me to get back to break even ( 30 ticks for the three 10 tick stop outs, 8 ticks for the 2 tick slippage on the 4 trades, and 2 ticks cost for the commission on the 4 trades at $5 per trade ). So , would you then have to ( if you trade on smaller timeframe charts ) switch to a larger timeframe chart, and hold out for that 10 point move, or would climbing your way back up, be better served ( more likely to be achieved ), if you locked in and took profit on two 5 point trades. How would you factor whether to shoot for a 10 point target ( once ) or two 5 point targets, is more realistic and likey to happen, and what if anything would you have to change to your trading strategy to achieve this, if you normally risk 10 ticks per trade with a target of 16 ticks , but have now been stopped out three times in a row, for a loss of 30 ticks?
Can you help answer these questions from other members on NexusFi?
I always have a 'floor' or 'ceiling' for each session I trade, basically a hard stop but I like coming up with my own names. Apart from that I scale in and out based on price action and volume, also I have a time stop where I know price is likely to reverse.
No I don't think you're crazy lol. I don't use stops ever. If a trade goes against me, I hedge it with another instrument. Markets will do what they wanna do. Keep your trades small and you won't get burned. Manage your winners and the rest will take care of themselves.
Received your pvt message but could not reply to it directly as per forum rules on post minimums for newbies so I am posting my answer here instead.
Your are correct in your assumption. For instance. Let's say I am short the ES from lower levels and once this trade has gone against me by 10 points (my tolerance level) I will hedge long with either the NQ, TF or YM. As you know, these instruments are often tightly coupled whereas they tend to move in the same direction. However, you also must take caution here as there are instances where they can decouple so choosing which instrument to hedge with is a matter of keeping a watchful eye on how they are trending.
When and if I do chose to hedge with the TF I will do a one for one on every ES contract and two for one with either the NQ or YM. Then as the markets begin to reverse I will take a profit and re-enter the long position as needed in keeping with the above example.
I also have given some thought to using the SPY, QQQ, etc., as others have suggested though I personally much prefer to use a future to hedge a future. Another method you could employ is to enter a pairs trade then simply drop the loosing side as it hits your lose tolerance.
Note that I have been in situations where the market has gone 80 - 100 points against me only to see it reverse for a profit. Had I entered the trade initially with a stop, I'd be out with a minimal lose however, it's not my preference or trading style but not suggesting this is for everyone either.
I too have traded the CL but find it too volatile so I never use it to hedge with. Have just recently begun to trade the GC but again not for the purpose of hedging.
Hope that helps to answer your questions and much success in your trading.
In my experience... It's best to adjust the number of contracts you trade and your stops based upon market volatility. Currently on the ES, a two point stop works fine for my strategy. But, back in the volatility of August 2011 a four point stop or more was necessary.
As for targets... My target is anywhere from around break even to 10+ points. I exit a trade after a minimum of three candles on the 5m and 15m charts, and as a rule I don't hold past five candles. I keep the same rules on all time based timeframes of 5m and higher.
You seem to have a sound and solid strategy but if you exit your trades on or slightly after the third candle on a 5 minute chart you really never get to see 3 candles on a 15 minute chart so perhaps you meant 1 candle instead?
No, If the trade setup appears on the 5m chart, three to five candles. If the trade setup appears on the 15m chart, three to five candles, etc...
And, it's a little more complicated. The count is from the reversal candle if the move is going in my favor like expected or better, if it's not... It's from the entry candle.
Was reviewing some old threads and came across this post of yours.
I too looked at the merits of hedging three or so years ago and could not get my mind convinced there was any benefit in doing hedging as I proposed.
I wanted to ask you some questions about how you were doing it, and what you were trying to achieve.
Firstly a practical question: when you were trading the ES why did you hedge with YM, TF or NQ and not the ES itself? I am vaguely aware that there may be some US laws that prevent US citizens from being long and short the same instrument at the same time (I am from NZ). But say you were short June 2015 ES, why would you not hedge by going long September 2015 ES for instance? In my investigations a few years ago my broker (US based) even agreed that I could open up a 2nd account (as long as the account name was the same) and have these both accessible via my trading platform under the same login. This would allow you to short and long the exact same instrument eg June ES.
Secondly, the following is what I was proposing to do a few years ago:
Say you are long the ES @2090 and you are not willing to take more than a 5 point risk. So if price drops to 2085 you then take out a hedge short (either via a 2nd trading account or by taking the short on the September contract). From that point on you have pegged your loss on the long to 5 points.
If price continues to fall (say to 2070) your net loss is still 5 points.
So far I get all this. But how do you get out of the short hedge. Eg price then starts to go up again and gets to 2085. Do you close your short hedge at this point for a B/E? At which point your long is then naked with a 5 point open loss.
If price continued to keep going up then all is well and good and your long moves into profit as was originally intended.
But what if price only got to 2090 and then started to go down again hitting 2085 once more – do you then put another short hedge on?
Do you then keep ‘rinsing and repeating’ this exercise as price oscillates around 2085? This would certainly create a lot of cost with commission and slippage?
And I guess where I struggle, is what does all this achieve? If price never comes back to 2090 in your trading tolerance timeframe then you have a 5 point loss, which is what you would have if you just took the stop (without the additional commission and slippage).
Isn’t the outcome the same if you just took the initial 5 point stop and then re-entered long again when you determined (via price action or signal or whatever) that price was going long again as originally anticipated?
Or are you doing this from a psychological perspective ie it just makes you feel better not to realise/crystalise a loss?
Or have I completely misunderstood what you are doing?
Sorry for not replying sooner but I had totally missed this one.
So at the time I was trading mainly the ES and hedging with other instruments because as you know it's not possible to be long/short the same instrument in the same account but your suggestion to hedge using the forward month contract had never occurred to me. Not certain about the effectiveness of the strategy from both a liquidity and correlation perspective but something to look into.
In your example above I would simply cut the short hedge loose once it began to go against me and would wait till price reversed to put on the short hedge once more just as you had mentioned. From my view I have simply banked a profit and reduced my cost basis. I don't look at paying commissions a negative as it is the cost of doing business. But then also and to your point one could surmise its a way to avert a loss and that it would be much easier to realize as you could always re-enter into a new trade. However, I believe that price reverts to the mean and hedging is just a way to manage a position that's gone rouge. It's no different than managing a stock or option position. In fact, I could choose to hedge with SPY options instead of a future instrument like the NQ, YM, ZB, etc. I've done that too.
Though in the end I would have to agree that there is the psychological aspect to all of this as no one really likes to loose but why take a loss if you don't have to as long as you are able to manage it? Lastly, a loss becomes inevitable just like death and taxes if you run out of time and get into the last week of the contract rollover period. The idea is to at least be as close to if not Break Even before then.
Apologies for sounding argumentative (if I do) but I must admit I look at this completely the other way round: it seems to me that if you manage your losers, the profits will take care of themselves. That fits comfortably with my overall concept of trading as being about "controlling losses" rather than being about "maximizing winners".
I never trade without stops.
I often trade without specific targets (for example, when trying to catch the beginning or continuation of a trend). I close those trades according to a variety of different eventualities all of which more or less boil down to specific instances of feeling that my reason for being in the trade is no longer valid.
I think stops and exits are hugely significant, and that many traders make the mistake (as I used to) of imagining that "if you get the entries right, everything else will work out ok". It doesn't follow at all.
The longer I trade, over the years, the more important I find it to let profits run.
There isn't and never will be a perfect answer to "when to exit". Whatever you do will sometimes be right and sometimes be wrong. It's very worthwhile coming up with a system which "just suits your own trading style", that you're comfortable with.
These are among the exit methods I've tried, over the years:-
Trailing stops being hit
Using a time factor of closing after a certain time-period
Heikin-Ashi candle color-changes (often on different speeds of chart from the one I used to open the trade)
Parabolic SAR methods (their originally intended use, I think?)
Sizes of apparent retracements
Donchian channels and related methods (e.g. closing a long trade after the lowest low of "x" periods has been reached, where "x" is some usually smallish number)
Candle/bar patterns making me suspect a reversal's likely
Trailing a stop just beyond the Kijun Sen line above/under the position of the third-previous bar/candle (I find this very promising for intraday trading, at the moment, and am far more interested in closing trades according to Ichimoku principles than in opening them that way)
