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real world stops and risk reward ratio.
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real world stops and risk reward ratio.

  #11 (permalink)
south africa
 
 
Posts: 170 since Dec 2018

This is the best thread I have ever found on stops. Every time I read it I found something new and interesting (keep in mind Nuclear Phynance sorts the thread backwards for some annoying reason)
Nuclear Phynance

"The concept is very seducing in itself: it looks like you might be able to cut-off tails of your distributions. However they always omit to mention that you have an uncertainty on the stop-loss itself, a P&L distribution of its own"

"If you need a stop, your trade is too big"

Those two quotes really changed my trading.

If you buy a call options you don't use a stop. You plan for what happens if the option expires worthless before you make the trade and size the trade accordingly.

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  #12 (permalink)
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Fixed risk on every trade...

So I've been doing a lot of market replay practice this weekend...Ignoring chores around the house for now. HA! I've been experimenting a little with STOP placement. I generally use Al Brooks methodology on placing stops, or I should say ATTEMPT to us Al Brooks methodology!. Generally you are putting stops 1-tick below a signal bar or entry bar, but sometimes they are going below that last swing high/low. During my market replay I've been attempting to learn price action and I'm also experimenting with different idiosyncratic modifications. One of these experiments has been the use of a fixed two point stop and it's been working really well. I've been trading 2 contracts, I take 1 off at 2 points (1R) and letting the other run for a swing. Are there many traders out there that use a fixed risk amount on every trade? Is it effective for them?

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  #13 (permalink)
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Salao View Post
So I've been doing a lot of market replay practice this weekend...Ignoring chores around the house for now. HA! I've been experimenting a little with STOP placement. I generally use Al Brooks methodology on placing stops, or I should say ATTEMPT to us Al Brooks methodology!. Generally you are putting stops 1-tick below a signal bar or entry bar, but sometimes they are going below that last swing high/low. During my market replay I've been attempting to learn price action and I'm also experimenting with different idiosyncratic modifications. One of these experiments has been the use of a fixed two point stop and it's been working really well. I've been trading 2 contracts, I take 1 off at 2 points (1R) and letting the other run for a swing. Are there many traders out there that use a fixed risk amount on every trade? Is it effective for them?

Hey @Salao! I used 2-point/8-tick stops exclusively up until recently. They seemed to work in sim but since reading Brooks I've started trying those wider stops live with /MES, no conclusions yet.

I love the 8-tick loss because they're so manageable, but your timing and trade-location have to be on point. 16-ticks has been nice with the /MES I think my win% is much improved for live trading with the 4-point stop, but there are a lot of variables involved that might also be factoring in (not as stressed at $1.25/tick so better judgment perhaps being one).

I think I need to try the /ES and see if I can stomach a 16-tick stop. I don't really like taking more than that , ie OVER 4-point losses), maybe because many of my winning trades are far below that currently so it seems skewed against me, which is another problem entirely!

Hope you're having a great weekend, happy trading!


Last edited by snax; June 8th, 2019 at 07:16 PM. Reason: Terrible math, I meant over 4-points, ie; 5+ point losses
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  #14 (permalink)
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Yo @snax ! The weekend is good thanks! Hope all is well over there in Chicago!

My stops have been really wide lately. They have been dictated by the chart so I think they have been reasonable enough. My win rate over the past month has been over 60%, but I have traded for a loss. My losers are bigger than my winners. As you said, there are a lot of variables involved here but generally there has just not been enough swing left after I enter to produce favorable math. And when there is enough swing, I find reasons to flatten. Hence, the losses.

This is why I have begun experimenting with 8 tick stops. I'm basically tightening up risk to to compensate for the idiosyncrasies embedded in my trading. I can hold a trade for 4 points with no problem, 8 points is a little harrowing, and in rare occasions I'm able to hold for 10+ points...this is what I've based my stop on during market replay this weekend. I've been trading 2 contracts and taking 1 off at 1R and 1 off at 2R. If both my targets are tagged I get 6 points. In the binary world of 'profit target hit' vs. 'getting stopped out' I need to be right 40% of the time and I will be ~BE. Which seems OK. There might be a live test on Monday...


Last edited by Salao; June 8th, 2019 at 05:59 PM. Reason: math is hard and other stuff is hard when multi-tasking
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  #15 (permalink)
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snax View Post
Hey @Salao!
I think I need to try the /ES and see if I can stomach a 16-tick stop. I don't really like taking more than that , ie 3-4 point losses, maybe because many of my winning trades are far below that currently so it seems skewed against me, which is another problem entirely!

This! This has been my problem! At 1R you have to be right more than 50% of the time. If you start to win significantly less than 1R, the closer you have to be to perfect to be profitable. And I have issues with perfection...


Last edited by Salao; June 8th, 2019 at 07:04 PM. Reason: probably should drink less coffee
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  #16 (permalink)
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Salao View Post
This! This has been my problem! At 1R you have to be right more than 50% of the time. If you start to win significantly less than 1R, the closer you have to be to perfect to be profitable. And I have issues with perfection...

I'm so sorry, I've since edited that, my math was terrible, I meant over 4-point losses. For example a 6-point/24-tick+ loss for me is something I need multiple trades usually to come back from with my current risk/reward-ratio. I have a lot of 4-12 tick winners, I'd like 24-tick+ winners to be more common but its a journey

Also great point about the Van Tharp R multiples. I should pay more attention to those.

P.S. I didn't realize I already responded to this thread earlier, this is a great thread and @Grantx brought up SEVERAL great points on page 1.


Last edited by snax; June 8th, 2019 at 07:38 PM. Reason: I think I finally was able to multiply 6 * 4 = 24 LOL. I need a beer; EVEN MORE edits, stepping away from the keyboard
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  #17 (permalink)
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This thread is moving towards PriceActionTradingSystem or as some of us say trading with Mack. Every Monday thru Thursday he puts up a 20 minute u-tube (free to all) talking about every single price action trade set up that he saw. It is a simplified Al Brooks method.

Where you are is really close but no Guacamole (sounds like a trade deal to me )-
1. 2 point stop 1 tick above signal bar, which is usually the swing high or low. Stop can be tighter but never wider so giant bars are not traded when they end.
2. A unit is four contracts, not two. So sandwich two more contracts inside your two point scalp for a one point profit. Three contracts on scalp, two go out for a point each, one goes out for two points. On profitable trades you usually get all three, but occasionally you just get the 1 pointers.
3. No mention of the critical break even move. When the trade goes five ticks in your favor it goes to break even on the two remaining contracts.
4. All of this is of course automated, so you just sit there with your buy stop or sell stop outside of the action and drag and drop into your set up as it happens.

I think if you run the numbers the closer to coin toss or worse on your wining percent the bigger your wins need to be. This system seems to let that fourth contract fail out at 0 about 60% of the time. But it does catch many of the big moves. I find over the course of 50 trades or so that it equals the profits from the scalping operation.

Supposedly this system takes advantage of the longer term harmonic rotations in the ES. All you need is for the market to move six ticks in your direction.

I have yet to figure out how to calculate Van Tharp's numbers on this system. To start there is not a fixed stop, so you have to use average loss for R. But because you are trading two systems with a common entry I get real confused about using his standard method or one of the complicated portfolio methods.

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  #18 (permalink)
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Dynamic approach

This is a topic I struggle with, thanks everyone who has contributed already very interesting and a lot to think about! I have found this to be very confusing, some traders seem to think risk reward has very little use in the real world, if you are day trading and your system/discretion tells you you can pull 1.5R or 0.8R out of the market but your rules say only go for 3R should you pass on the trade meaning pass on $? Others seem to think it's a crucial part of trading success.

I had a very profitable start of the year, consistently made money every week and made about the same on my winning days as my losing days but there were way more winning days. Then it reversed and I was having more losing days than profitable days and the losing days were about twice as big. I was just trading the market, a stop and very soft targets, this worked until it stopped working and then I was lost. So I thought Risk reward would save me, and it kind of did, except now I was losing money everyday but they were small losses . At this point I think I realized what was wrong, I had deviated from my setups and my read of the market and I was only focusing on the money management aspect of trading (where does my stop go). I then started reading a lot about how we can skew the risk reward while we are in the trade, in the moment not before the trade, I think that my job before the trade is to figure out where I'm wrong and set this as a bail out point and I've learned the painful way by a thousands cuts that this is way further away than I'm comfortable with.

I think because I can't predict the future only trade the probabilities I should look for high probability setups and then when the trade starts moving either against me or for me act accordingly to some methodology, this seems to be very individual but after reading about @Inletcap and his scaling in/out method and futurestrader71 all in/scale out and @tigertrader who presses the winners by holding longer and pyramiding(I think this is what he does), all of these methods exist to skew the risk reward in their favor after they enter and not before.

I'm personally trying all of them right now but placing my stop at the correct "I'm definitely wrong here" spot so for has put me on the right track again (I think) and weirdly makes me more calm even tough I'm risking more points. Scaling out at decent R (sometimes less than 1R for the first scale out) and trying to hold for as long as possible makes sense to me, also adding to winners on trend days makes a lot of sense, I just have never been able to do it just yet . Oh and I also realized that the losing days had a lot more trades than the winning days, perhaps we should focus more on the daily risk reward and less on the RR of every trade?

Velox

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  #19 (permalink)
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If that place "where you def. Know that your wrong" is so far away why dont you wait for a better trade location?

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  #20 (permalink)
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Yes that is one of the things I started working on however I was placing my stop within the noise of market, I would often enter get stopped out for 10ticks and see that my setup is still valid (couldn't see it while I was in the trade) and get back in.

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