stop loss and profit target should be fixed or variable?
Hello i wanna ask a question. I am sure lots of you are better than me in trading. I made a mechanical system to trade in index futures. I use daily bars for trading. I also added take profit and stop loss elements into system. These elements work by multiplying the value of the index by a coefficient at the entry and calculates stop loss and take profit levels. I optimized these coefficients. So my tp and sl is variable according to index price. Do you think is this a good idea? Why i am asking this is when i checked the entry points 4 years ago index was not that high so all these elements become smaller and profits became really low in that year. Do you think that i should stick to fixed stop loss and a variable profit target or variable stop and fixed profit target or both of them fixed? I am an individual trader and i do not know how professional trading systems work. Are they based on fixed stops and fixed profit targets or variable. Thx in advance.
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This post has been selected as an answer to the original posters question
The market is "variable" in that it does not trade its future exactly as its past. If it did, then using price history to dictate future results would make us all winners which is an impossibility given the necessity that some must lose in order for others to win. Therefore, using a mathematical approach like a coefficient to produce a variety of entry and exit points would make sense. Whether or not the coefficient approach is a sufficient edge to make money, I would not know. If you have an endless pile of capital to pour into it, then you will get an education one way or another. Should you use fixed positions for entry and exits is a consideration for those with fixed account sizes or fixed capitalization amounts. As is often the case, risk to ruin ratios are mathematical, too. With that in mind, if your total account risk capital is fixed in size, then your trade position should probably reflect the same.
With that said, what I say now would seem to disqualify everything I just said -- I watch traders who test the market with low risk (short stops) position trades. They may lose 3,4, or 5 trades in a row until the market defends their conviction. Then, they add on as the position matures with targets far out -- taking profits at places of support and adding on in pullbacks. This takes maturity of mind and emotion. These are the traders worth emulating.
Thx for this great reply. A few things boggling my mind tho. That guy on the forum told that he bought a blackbox system and told really expensive. (He is using it for 3 years already. It is completely trading robot. He does not how it works.) to trade on Index Futures and he told that that trading system has a fixed stop. It hits a few times in a week and when he checks his account losses are the same everytime. So he concluded that it is a fixed SL. Also he mentioned that that system has a very nice steady gains for 3 years. This conflicts with my logic. Normally if Index is low, stop loss must be low and if it is high it needs to be a bit bigger. Same for Take Profit level. But this is not the case Pro systems work I think. Also whe i read your reply there is no solid rule about the things I asked for these two. It comes down to preference I suppose. But I do not want to lose the edge if changing these two would give that edge to me. I have constant money by the way. My account is low. I trade fixed number of contracts everytime. I do not believe in my system that much to add contract size as time passes.
Last edited by tripanasoma; January 3rd, 2015 at 08:33 PM.
As I stated, I know precious little about your coefficient system, in this case the black box system you just tagged by name. For one to trade a system they do not understand places them at the mercy of the designer. Also, any trading system that you yourself cannot test may well be hiding something. To take the word of someone on 'the forum' makes you a target for any shill and snake oil sales person. I am not saying that black box systems do not work or can't work, I trade my own black box system -- but therein lies the difference. I created it and know why it does what it does.
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It is normal you think of me as a sales person because of the message I posted above but I WOULD NEVER EVER trade a blackbox system too. This is why I am here. I am trying to make a mechanical system of by my own and I could not decide whether to make TP and SL levels variable or not. I think this is a big problem. This is a big decision I should make. I am here to hear your experiences. Do not understand me wrong please. I just can't decide now. I want to make more experiments tomorrow with fixed SL and fixed PT and I will share my observations with you afterwards in here. I just wonder if there is a solid rule sthg like `SL must be fixed` `TP can be variable` or the other alternatives. I read Van Tharps book and he mentions about R multiple system. But R Multiple is not perfectly suitable for mehanical system. My system is a trend follower so I want to ride on the wave as much as I can but interestingly I observed that when I put TP and SL, my gains increase. So that I decided to put them on. But do not know how to adjust them. I am not here for advertising anything. (My coefficients are like these. For example Index is 7000 now. When I enter a position I multiply this with 0.99 for Stoploss and 1.02 for TP) It is this simple. When index changes these 2 adjusted accordingly.)
And one more thing: For a trend following system, putting TP levels logical or not? This does not look right at first but when you do it it becomes profitable. Normally you would think that putting TP levels on a trend following system decrease gains. But when I backtest it was more profitable. This is another thing by the way, not our topic.
Last edited by tripanasoma; January 3rd, 2015 at 09:33 PM.
@tripanasoma -- that is the question - when is a trend still a trend. Because if it is not 'the trend' then it is 'the pullback.' My own black box is 'trend following.' The three elements of my own system are trend, pullback (setup) and entry. In fact, anyone can say 'follow the tend' without mentioning how they calculate 'the trend.' Like everyone else, that is the question to be wrestled with when one chooses a 'trend following system.' Once I determined how to quantify my method of identifying trend, everything else is a pullback followed by an entry based on a risk to reward.
To quantify tick risk when trading the ES, for example, I strictly use a fixed TP for the first set of contracts in order to create a 'free trade'. The last set of contracts are runners trailed by a fixed stop loss order. Other refinements to the system continue to increase profit percentage.
In answer to your last question, TP levels are logical. If only when trading black box. Moving your trade, as quickly as possible, into a less risky position may reduce risk but limit profit. On the other hand, Excel data, generate in real time, can demonstrate the probability of hitting your first TP when your system takes a trade. With high expectancy, making money is only a matter of adding contracts based on account size.
Can't help you with VanTharp's R Multiples. Only trying to help you with seeing the big picture if you plan to go down the black box road.
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