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STOPS are Frustrating (SL) ...to take or not to take
STOPS are Frustrating (SL) ...to take or not to take
tigertrader
Philly, Pa
Legendary Market Wizard
Experience: Master
Platform: NinjaTrader
Trading: ES, ZB
Posts: 6,482 since Jul 2010
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All you are doing, is "locking in" or "spreading out" of a loser. The only way this would be advantageous, is if you were legging on the spread the right way ( in the direction of the prevailing trend). If not, you are actually increasing your exposure and your transaction costs, relative to trading in-and-out of an outright. The bigger you trade the less sense this strategy will make.
Can you help answer these questions from other members on NexusFi?
I am going to offer analogy to the stop loss issue that initially might seem absurd but please bear with me.
I used to box professionally years ago 1980s out of Detroit Michigan. i was fortunate to train in Detroit during an era where boxing's popularity was at its zenith and their was no place in the world with more top contenders and world champions than Detroit. I had the unique opportunity to spar with champions and legends from that era. Your adversary in the markets is often similarly skilled - we forget he is out there.
What I learned very early on about pro fighting is that you cannot let taking damage change your focus or your game plan. This is not an easy task because if you are fighting someone with quicker hands you are going to take a lot of damage. Your nose or your eye is going to be a target all night. It pisses you off and sometimes it is really painful . Some fighters are especially dirty as they clip you with an elbow when they can or scrape the laces on the glove into your face during clinches. You are taught these tactics. It is psychological warfare as much as anything. It can get you off your game and then if you get angry you really can get cracked. If you have any doubt about this philosophy go watch the Leonard - Hagler fight. They both get hit alot and in every round. Boxing looks spontaneous but it is anything but. You train the same combinations and tactics relentlessly until they give the illusion that they are improvised.So I have learned or decided to see stops as taking damage and f___ it. I knew there is no way I am not going to get hit going into a fight and there is no way I am not going to get stopped out if I stick my face into the market. Better than getting knocked out. (Which actually does not hurt but the memory is not so good the rest of day.) I hope this analogy makes sense. Conversely if I sense I have an advantage - one valuable lesson I learned from being in Linda Raschke's trading room - I will add to my position and go in for the kill -this is where the real money can be made and the rest of the hit/ get hit stuff becomes irrelevent.
I posted this almost one year ago today. I love the boxing analogy in reference to trading -big fight next week, btw.
It has always been my contention that trading is not rocket science, but more like the sweet science. Just like a boxer steps into the ring to fight a larger, stronger opponent, a traders sits down in front of his screen(s), and faces what is arguably a much tougher and more formidable opponent. At times the trader’s opponent is very predictable and easy to hit, but the majority of the time, his opponent is extremely unpredictable and elusive.
A good fighter will recognize the type of opponent he is facing that night by gradually sizing up his opponent's strengths and weaknesses, and then “take what’s given him”, and a good trader will analyze the market’s price action, and do the same. Just like the fighter, the trader will know his opponent’s tendencies and have a plan, and just like the fighter,the trader will ultimately rely on his instincts and his ability to analyze the type of market that is confronting him currently, and adjust accordingly.
The boxing analogy to trading was never more apparent to me than last night, as I watched Manny Pacuiao pick apart the much larger and stronger Tony Margarito. It was all there on display:; skill, technique, pacing, discipline, and patience. Manny took advantage of what was given to him, and exploited Margarito’s weaknesses, while staying away from his opponent’s strengths. He took the fight to Tony and pressed at the right times, and when the openings weren't there, he pulled back and rested.
Good traders share the same attributes as good fighters. They know and understand their opponent, and don’t take anything for granted. They don’t underestimate their opponent, leaving themselves vulnerable to a “knockout”, and they don’t overestimate their adversary, rendering themselves intimidated and tentative.
There are times when the market is only giving you scalps, and there are trend days or event driven moves, where there might be +20 points in a trade. A good trader will recognize the difference and know when to go for the knockout. Successful traders control their risk, but when the opportunity presents itself, they will hold, press, and add to their winners.
As @ Michael H. stated, you can scalp and make money, but it’s a lot of work. It may also appear to be less risky, because you are taking smaller losses, but you are also going to be taking many more losses. Mike also emphasized reading the tape, which is another way of saying he watches price action. He failed to mention anything about “indicators” or systems. There is too much emphasis on “tools” for trading, and not enough emphasis on developing an intuitive feel for the market. Do traders really need an indicator, to tell them when the market is choppy? Quite simply, if you can accurately interpret price action and you have a good money management methodology, you are going to make a lot of money.
I find there is a very strong positive correlation between my P&L and the amount of time I am in a trade. I am not concerned with my percentage of winners, but more concerned with the size of my winners relative to my losers and my hold time. I’ll risk 5 or 6 ticks on 50 bonds, and sit with the trade for 4 hours or more, if there is a high probability I can take a point out of the trade. Just like a boxer must learn not to be afraid to get hit, a trader must learn not to be afraid to lose money. In fact, I much rather risk 3-4 points in the ES, to make 10-12 points, then to risk 1 point to make 3 points. I am going to get stopped out much less, and I am going to make much more money. Of course, you need markets that are moving, and that have much larger ranges than we are currently experiencing to execute this strategy.
As Bill Eckhardt remarked, you can go broke taking profits, if those profits are too small. IMO, the only way to make a lot of money trading electronically, is to hold your winning trades for a longer period of time. This will allow you to to trade with wider stops, which will result in getting stopped out less. It’s O.K. to pick your opponent apart and win the contest by outscoring him, but if you want to take it to the next level, you have to know when to go for the knockout and the big win.
You can't be an effective fighter, if you are afraid to get hit; and you can't be a profitable trader, if you are afraid to get stopped out/ lose money. Nevertheless, you don't want to be the market's George Chuvalo, either. So, knowing where to place your stops, is just as important as learning how to slip punches.
George Chuvalo, you are a boxing fan. He did have a lot of power but unfortunately he had to deal with Cassius Clay. Appreciate and enjoyed your thoughtful response. Cheers.
tiger: Appreciate your comments. If you or anyone else have stat's regarding MAE on these setups.. I'd love to know a typical sweet spot over my tight stops..and YES..at times I get nicked by a tick or two and end up jumping back in which really messes up my P&L... I have always believed you slice it close or move away from the herd and take a larger stop if you're wrong..just haven't quantified it.. to see the net result... You are spot on with the stop hunting comment.. Markets will rotate & take out the weak hands..this is why I give a lot back since I do not move my stop past B/E unless we really start trending... even then there is a lot of room...
I am not comfortable building position up on rotations unless we have something real strong going on - violent - then I will add back a ratio based on my scales.. Of course it lowers my average price so I like to make sure I have enough in there to net something & get paid if mkt comes back to my avaerage price...
This is an area I am just not sharp in.. In a strong trend I will add and will press the position especially if the profile shows me some good levels to target..
I would apprec any help I can get on stop placement... especially since we have similar styles and trailing stops if you have a good process for that.. In a trending market I find a 1.25 r and a 50ma or 1.0 r & 50ma are good spots to trail behind and also good spots to enter on retracement if it aligns with a node...
I have tried .40 Renko for trailing stops but it gets me out of the trade so I am just playing with it...
Another issue I have is when I have 4-5 pts and I have only gotten my first 2 pt ES scale and then it all comes back... to B/E...
Any thoughts you or the group have would be most appreciated..
RWhitt: Back when I first started out.. kept charts by hand on an interday basis.. I was trading T-Bills.. I was daytrading them in the Stoneage - with just a quote machine.. I saw I could take $300 - $700 / day out since at that time there were no 30yr Bonds so T-Bills it was. $25./tic I think...
I put my first trade on I immediatly had 3 ticks made and then ... Paul Volcker, then head of the Fed raises the Discount rate during market hours.. I was in the trade 4 minutes... I was long, market went locked limit down.. Holy Crapola!!! MY dreams of riches and my little trading account were about to be gone.. I didn't know what to do... Since it was limit down there was nothing to do... no I didn't have a stop... GRRR.
NExt day I come in and it opens limit down... I add $ to my midget account to meet margin call.
3rd day I come in it opens limit down... I can't take it anymore and I spread it off.. I sell a back month aginst the front.. That was the low of the move and the market came off limit later in the day... and rallied all the way back plus... Moral: I had locked in my loss.
Tuition... If you want to trade spreads they can be great but dangerous since there are 2 legs..I traded currency spreads for years and really liked them. I would lift one side of the spread and then put it back on and improve my position..talk about multidimensional. This was before pairs. You could leverage up since margin was maybe half of outright, theoretically you were "hedged" but you really aren't.. Same in Old Crop/New Crop Bean Spreads..another way to meet your Maker early...
My takeaway from my T-Bill trade is to have a plan, take the hit you accomodated for, clear your head, there is another bus coming shortly. Locking in a loss uses a lot of energy and emotional capital... and when things get out of whack you can lose on both sides..with no real risk management...
I found that if I position correctly, that is my job..the market will either approve my hypothesis or not.. When I'm wrong, I want to get out so I can realign with the emerging trend..
Not to say I am correct but my T-Bill Trade was a mini-course in what not to do..among many others I've paid the tuition for along the way . I try very hard not to repeat those courses and pay the tuition again. Hope this gives you some perspective.... I believe there are better ways to manage risk and leaning on GLobex H/L is not really good support/resistance though the market will often test those levels, since Cash MArket wasn't open they don't mean much..at least in my experience... I do watch GLobex VPOC & H/L. The Globex VPOC seems to have more value to lean on if we open near it.. But that's just the way I see it..others may have different experiences...
In trading You have to be ready for anything and everything. I call it "the things you know and the things you know you don't know." Ex. I was long ES during Globex the morning of 9/11.. That is for another day..
The interesting discussion of defense in boxing and acknowledging the reality of getting hit ( trading stops ) sometimes overshadows the flip side of the problem - our offensive weapons we go to war with or how recklessly we attack our opponent. And as Tigertrader said do we really need all these indicators ( apparent weapons ) to deal with our opponent ( aka other traders ) ". (NB I have alot of time on my hands to wax philiosophic because I am non trading bardo dwelling MF Global client.)
As a boxer - reality is, you need another job - because only the top .1% make real money. I knew top ten RANKED fighters who were on CBS fighting for a title and still washed dishes at Buddies Pizza in Detroit. Anyhow for me and many guys I knew - bar bouncer was the bill paying part of your career. (Even Tommy Hearns bounced in Windsor at one time) You trained during the day and nights you worked the door. Survival in a bar - strip clubs to be exact - meant you were regularly at odds with customers. Regular bars customers fight customers , strip clubs bouncers beat up customers. That is why regular bars can get by with two football players at the door but we always had 6 guys on who were either boxers or hockey players.
Anyhow fighting in a bar in close quarters combat. You limit the tools you use. For me a tight left hook ( or elbow ) and knee to their gut or head was my entire arsenal. I closely watched the right shoulder of the idiot I was dealing with and I knew if something was coming. Mostly I just hit him first. I did this five nights a week for seven years straight and I never was hit once. Not because I was big or especially skilled or tough I just knew exactly and only what I was going to do if it looked like a fight was going to break out. But it took years for me to tranfer this logic to my trading.
In trading like flashy bright lights we have too much information and too many weapons and too many targets. It is seductive because you think you are at a buffet but really you are on the plate. It is very difficult to maintain a rational consistent defense if our offense is too complicated and we are trying combat multiple opponents. I remember Linda Raschke say once pick a market, one set up you understand and trust and just keep working it. Makes too much sense - but that is exactly how I survived in very dangerous environment. Hope this was helpful to somebody.
All you really need is: Father Guido Sarducci's Five Minute Trading University.
master the 4m’s
markets- price action
mental- discipline
methodology - cut you losses, let your profits run
money management - risk less than you expect to make
In advance I am sorry, I am new to blogging and it might be an offence to post the same message twice, but I don't know how to quote my other thread.
First off I like to sleep at night, so if you are a new trader don’t misunderstand this as a license to go out on a high risk long with no plan and blow your account out. Many very profitable traders are big on stops and so you should know there must be some wisdom there. Please treat this post more as an intellectual exercise.
There is this really important idea that casinos don’t make their money based on the “edge” of the game but in fact do make there money based when the player runs out of money. Dr. Tharp and Ralph Vince talk about the risk of ruin even in a game 60% in your favour.
Here is a copy found all over the net: https://www.otrader.com.au/dloads/difficultmakemoney.pdf
What this says is that a casino would still win even in a 50/50 game like coin toss.
Also in effect it says if you built an automated trading system that can win 60% of the time, if it bets a big part of your account, it will still blow up your account. We know this as getting through a drawdown.
That really came home to a trader with a bunch of trailing stops during the “flash crash”, that was the ultimate run at the stops.
All that is nothing new . . . but I have been thinking that a stop loss is a little bit like a mini blowing up of your account. You can build almost any automated trading system you like and if you introduce a stop loss in your back-test you will usually get a lower overall return. That really gets to me, because using backtesting and computers it becomes clear that the common wisdom of always use a stop is not good for your return. (Of course you can place your stops so far out they almost never trigger, but that is just about like no stop at all.) Stops are like the gambler who must stop vs the house that does not have to stop. Of course the ultimate stop is blowing up your account.
In the bigger picture, if the market were full of traders with stops and many other traders with under-funded accounts, it would cause the market to drop faster than it rises, a phenonium we do see in the markets. Like a casino, a draw-down or string of bets loosing means the player must quit, this would cause funds to transfer from the player to the “house” or in the market the better funded pros with better risk management feed on the small speculators. You can also say new money comes in to the market, but it just bounces around, until someone losses and steps away from the table. Fear and greed come in again. The amateurs would give up on the market just when they should buy. The old floor traders used to say, when you feel like you want to puke on your shoes, it’s probably time to buy more.
I recall years ago learning a fascinating idea that a stock with a big “short interest” can rocket up if the shorts get squeezed and they all must cover. Imagine the emotions of someone with a great short but the stock rises anyway (like Netflicks last year). They must feel just like the guy in Vegas when his ATM card says no more money for you. At some point you reach a pain threshold, margin call or just go broke. In a way, it is at this point your money is released back into the trading system. This happens not just to one trader but thousands at once. When the selling pressure is finally off, the stock must do something and when you are all out of sellers that something is the stock goes up in value.
I have thought about how you trade this, and it begins to sound like old trader wisdom, “buy on the pull back” and “keep your powder dry”. It even gets a bit like Warren Buffet. I have built a number of automated trading systems based on simple indicators, but the ones based on price using “pull backs” usually outperform. In a way you are buying at fire sale prices, buying low to sell high later. This really should not be a surprise that it works.
But as for stops, they are needed not because they make sense, but because they let humans trade with comfort. If you can’t relax you cannot day trade, but you will pay a fee to the market for that comfort. The pro traders tell me it is worth the cost.
. I try very hard not to repeat those courses and pay the tuition again. Hope this gives you some perspective.... I believe there are better ways to manage risk and leaning on GLobex H/L is not really good 