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contract combo - # to scalp & # to run - profit target vs risk


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contract combo - # to scalp & # to run - profit target vs risk

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 optiontraderz 
Salt Lake City, Utah
 
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I am trying to determine what is the best combination for how many contracts to scalp vs. runners and the profit target vs the risk. For example, looking at having 3 contracts on ES (emini S&P) with 2 scalping out 1.00 point profit target and 1 runner (that moves to Breakeven+1 once the scalp is filled) and using a default 2.00 stop. Will often tighten up the stop to 2 ticks above/below the last swing. If I get a 2.00 stop, then I have to have 3 successful scalp trades (if the runner gets stopped out at BE+1) to make up for 1 loss. Wondering what combinations other traders use for better math odds.

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 Big Mike 
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optiontraderz View Post
I am trying to determine what is the best combination for how many contracts to scalp vs. runners and the profit target vs the risk. For example, looking at having 3 contracts on ES (emini S&P) with 2 scalping out 1.00 point profit target and 1 runner (that moves to Breakeven+1 once the scalp is filled) and using a default 2.00 stop. Will often tighten up the stop to 2 ticks above/below the last swing. If I get a 2.00 stop, then I have to have 3 successful scalp trades (if the runner gets stopped out at BE+1) to make up for 1 loss. Wondering what combinations other traders use for better math odds.

Most everyone will tell you that all-in, all-out is mathematically superior. Scaling in or scaling out is an advanced trade, and is generally only done on larger time frames (not scalping) and also largely for psychological reasons more than mathematical ones.

One thing I can say is you should almost 100% certainly stop moving your stop to breakeven. A lot of traders do this to "minimize risk", but what they are left with is a trade that went in their favor but they exited for no reason other than a psychological one.

Move stops solely on the basis of price action. I would also place targets solely on the basis of price structure (to the left).

Mike

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 trendwaves 
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I was just having this conversation with a fellow trader yesterday so I thought I would chime in with my 2 cents worth ...

First, in Mikes excellent response he summarized what I was trying to convince my friend to consider as well.

The problem with a 'feel good' breakeven stop is that it changes the math underlying your trade strategy. As Mike succinctly points out, stripping away the risk that quickly is an instant stress relief, but it has nothing to do with any market signal. In fact the initial indication from the market is your trade entry decision is being confirmed positively, which should give you an incentive to stay with the trade, give the trade time to run.

Mathematically here is the hidden problem: Your initial risk is 24 ticks (8 ticks * 3 contracts), when you take one contract off at + 4 ticks of profit, at that moment, without moving your stop you have cut your open risk in half to 12 ticks ( 2 remaining cars * 8 ticks - 4 ticks profit on the 1 closed contract). No major problem so far. The problem is when you pull the stop to breakeven + 1 tick, giving your new trade only 3 ticks of wiggle room to continue on to a larger profit target. Changing strategy from an 8 tick stop to a 3 tick stop in the middle of the trade 'blows up' the win probability on the open 2 contracts. Meaning it's a lot more likely the 3 tick stop will be taken than an 8 tick stop. So what you end up inadvertently doing is shifting the 8 ticks of risk on those 2 contracts into the next losing trade. You get 4 ticks of profit on 1 car, 2 ticks of $0 on 2 cars, then take the full 8 ticks of stop loss on all 3 cars on the next losing trade, net you end up with -20 ticks on 2 trades.

Now if you were to instead maintain the initial 8 ticks of risk per contract by moving your stop only 4 ticks, (maintaining the 8 ticks from the 4 tick profit target that was just filled), your open risk at that moment would be cut 83% to 4 ticks total ($50) ( 4 ticks * 2 cars - 4 ticks profit on 1 closed). This technique, maintains your initial stop distance of 8 ticks and only risks a total of $50 on the open position. You will have stripped away 80% of your initial risk and maintained a constant win probability throughout the trade. This gives the trade the breathing space (8 ticks .vs. 3 ticks) it will need to run to larger profit targets with a much lower probability of the stop being hit prematurely.

Compare these two stop management strategies across 100 trades and you will see a significant effect on all of your trade profitability metrics.

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