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Let's say your strategy is to enter at 1/2 back. You see a move in /es from 1950 up to 1960 then a pullback to 1955, so you enter long. Would it be better to buy 1 contract and put a target of 1957 and a stop at 1953 or buy 2 contracts and put a target at 1956 and a stop at 1954?
In other words if a trader can afford to put on a much larger position is it better to go larger and get out quicker or stay small and need more move in your direction? This is assuming that one has plenty of capitol to trade either size.
“Enter by the narrow gate; for wide is the gate and broad is the way that leads to destruction, and there are many who go in by it. Because narrow is the gate and difficult is the way which leads to life, and there are few who find it.
Can you help answer these questions from other members on NexusFi?
Without getting into too many context issues, you would be better off either A) buy 1, stop at 54, then buy another at 50, stop at 49. OR B) The size of your stop should be no more than 80% of the profit you already made on your first move. The amount of profit you make will determine the size of the trade you are allowed to make.
Ok, let's say you are backtesting a strategy. The first time you set the system to always enter 1 contract and to always use a 4 point target and a 2 point stop. So, lets say that yields 5000.00 profit.
Now, backtest the exact same strategy on the same data but this time set to enter 2 contracts with a 2 point target and a 1 point stop. Do you think it will make more or less or the same?
“Enter by the narrow gate; for wide is the gate and broad is the way that leads to destruction, and there are many who go in by it. Because narrow is the gate and difficult is the way which leads to life, and there are few who find it.
Well, if either of those two systems made money, you will probably need to redo your backtest with actual tick data (1-minute data will not be accurate enough), you would need to include commissions and you would need to implement a realistic slippage expectation. Once you factor in those items, then I really doubt that either of these two system will make money.
However, if you adjust the stops and targets to a 20 tick stop with a 40 tick target and and 10 tick stop with a 20 tick target, then you can start drawing some conclusions from this. You may find that the system with the 10 tick stop gets stopped out easier than the system with the 20 tick stop which will decrease its win%. If you are inside the "noise"-range, i.e. the area where the market naturally oscillates (this changes constantly) with the 10 tick stop system, while the 20-tick stop system is outside of this, you may find that the 20 tick system will outperform since it does not get stopped out that frequently, i.e. it does not get chopped to death.
The larger profit target will also affect profitability, but with this it is much more difficult to quantify the effect. Smaller targets will be hit more frequently than larger targets, but if your stop is too close, then it won't matter since you will just be stopped out before the target can be reached. It is all about finding the right balance and this is just one of the aspects that make trading tricky.
I leave you with a final thought on the matter - most retail traders try and maximise the gains by utilising very close stops with large leverage - 95% of retail traders do not make money.
