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Fixed vs trailing stops


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Fixed vs trailing stops

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  #21 (permalink)
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For the last 2 years I have painstakingly broke many markets down mathematically, using just price action. In doing so, I have been able to dissect each one into its own tendencies. I have done this using different mathematical methods. What I have found with mean reversion is that one must not think in terms of sideways or range alone. You need to think in terms of ranges that correspond to a relative midline of movement. Doing so will allow you to get the small moves within a sideways trading range, as well as the bigger moves that come using mean reversion within a trending market.

Knowing what I have found, using any protective stops within a mean reversion strategy will kill its performance and most likely make it fail. Although I still use an emergency stop in case of a market crash. But that stop is outside the parameters of any current natural movement for the corresponding market.



bobwest View Post
This has been my experience also, but then, I don't do mean reversion very well either.

I think that, assuming you do mean-reversion trading (trading defined ranges and looking to bounce from the extremes back to the mean or maybe to the other side), it seems that the only thing that makes sense would be to put your stop just outside the range so if you're long, for instance, your stop is below the recent lows to protect you if it's not a range after all. Then you set a target to get out after a smallish move in your favor, maybe before the opposite extreme (or maybe the mid-point, near the mean), because that's likely all you'll get if it's truly a range. Maybe you even just make your target a fixed amount you want to grab in a hurry if you get it. Then fire it and wait and see....

To put a stop just outside the range will be a showstopper. You may feel you are protecting yourself, but it is most likely the strategy that is inefficient.
Putting a profit target to get out of a smallish move in you favor may be proper for the current range but is not wise if the range is showing expansion.
As for using a fixed targetů You will limit your opportunities and certainly drive down the performance of any good reverting strategy.

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  #22 (permalink)
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WoodyFox View Post
Fo What I have found with mean reversion is that one must not think in terms of sideways or range alone. You need to think in terms of ranges that correspond to a relative midline of movement. Doing so will allow you to get the small moves within a sideways trading range, as well as the bigger moves that come using mean reversion within a trending market.

Makes sense.


Quoting 
To put a stop just outside the range will be a showstopper. You may feel you are protecting yourself, but it is most likely the strategy that is inefficient.
Putting a profit target to get out of a smallish move in you favor may be proper for the current range but is not wise if the range is showing expansion.
As for using a fixed targetů You will limit your opportunities and certainly drive down the performance of any good reverting strategy.

This summarizes my experience pretty well, which is why I don't even try to trade ranges.

You're right about mean reversion in trends though, which definitely happens. I was focused a little too much on the range situation when I responded before, but I can see how similar thinking applies to both ranges and trends if you think in terms of the midline. Food for thought.

Bob.

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  #23 (permalink)
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Personally, I have found a home in the trading range day. . So I'll share what's helpful for me...with the caveat: Different strokes, for different folks. . I have found that trading outside-in, and using a fixed stop based on a measured move projection placed outside of the range, is as good as it gets for trading these things. In this scenario our stop placement allows for an amount of range expansion, but gets us out of the trade when the odds of a breakout become more likely. The maths tend to work out here even when selecting a 1R target (and probably less) because of how often breakouts fail.

I don't think I've seen any traders that consistently and successfully trail stops during trading ranges. I imagine this is because of all the randomness within the vortex of trading range. As p/a moves away from the edges of the range, things get pretty 50/50. Meaning there is a 50% chance the market will move x-ticks in one direction, before it moves x-ticks in the other direction. Not optimal for trailing a snug stop.

But I have seen traders have some huge days trailing stops during trend days. So it seems like a winning strategy for a trending market. .

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  #24 (permalink)
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Salao View Post
Personally, I have found a home in the trading range day. . So I'll share what's helpful for me...with the caveat: Different strokes, for different folks. . I have found that trading outside-in, and using a fixed stop based on a measured move projection placed outside of the range, is as good as it gets for trading these things. In this scenario our stop placement allows for an amount of range expansion, but gets us out of the trade when the odds of a breakout become more likely. The maths tend to work out here even when selecting a 1R target (and probably less) because of how often breakouts fail.

I don't think I've seen any traders that consistently and successfully trail stops during trading ranges. I imagine this is because of all the randomness within the vortex of trading range. As p/a moves away from the edges of the range, things get pretty 50/50. Meaning there is a 50% chance the market will move x-ticks in one direction, before it moves x-ticks in the other direction. Not optimal for trailing a snug stop.

But I have seen traders have some huge days trailing stops during trend days. So it seems like a winning strategy for a trending market. .

With all do respect, and as you said Different strokes, for different folks. 😊 If you place stops outside a trading range, you will be killing the performance of any long term mean reverting trading strategy. Even when adapting your trading range based on statistics of any market in question, your placing pressure upon yourself to more accurately pic the tops and bottoms of the range. The MAE of any strategy is the price you pay to play. To anticipate the expected MAE of each individual trade would require a perfect reading of Volume profile and in a sense, know the intentions of the Bigger market participants. These fake breakouts are in fact the points of maximum pressure that big money will place among retail traders.

There is no fixed ATR stop that can be used within a mean reverting strategy to maximize profit. It will in fact only minimize loss at the cost of losing profit potential. This can and usually drives the strategy to failure.

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  #25 (permalink)
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I personally think there are only two types of traders (well, I'm slightly exaggerating to make a point ), trading range traders and trend traders, and that they come from completely different planets.

So, when a range trader writes something in their journal like "I don't know why I'm always fading trends," (as they very often do), I think to myself, "Because you can't help it, you don't think there are any trends." And when a trend trader such as myself writes in their (my) journal "I don't know why I'm always getting in at the end of a short-term move that turns right around," I should think to myself, "Because you can't help it, you think everything is a trend."

I also think that every rangist likes near-term targets (all ranges are short, compared to trends anyway), and many trendists don't believe in targets, or set them way far out there (if you hit your target before the trend is over, you watch price keep on going without you.) As to stops, @WoodyFox wrote about mean reversion in a trend, which is a real thing, and it can complicate trailing a stop -- for instance, you trail your stop, price comes back in a brief correction and takes you out, then it moves back on up without you, you trail your stop again, price comes back again, etc. (I'm not sure that's what he meant, but it's how I took it. ) Still, you will tend to see more fixed, unmoved stops with traders who expect a short, range move, and more moving of stops in the trend direction with traders who want to ride the trend -- and think who they are in one, of course.

Again, I am deliberately exaggerating and over-simplifying, and certainly not everyone reading this will agree, and it doesn't really apply completely to anyone, probably -- but there is a clear difference between these different ways to look at the market, and sometimes one works better than the other. I would like to be flexible enough to move easily between them, and I have to say that I am still working on it, but am not there yet.

But getting back to the point of this thread, I think this is why there is no always-right answer to the "fixed or trailing" stop question -- it really does depend on what the market is doing, or at least what you judge the market is doing at the time.

Bob..

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  #26 (permalink)
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WoodyFox View Post
With all do respect, and as you said Different strokes, for different folks. 😊 If you place stops outside a trading range, you will be killing the performance of any long term mean reverting trading strategy. Even when adapting your trading range based on statistics of any market in question, your placing pressure upon yourself to more accurately pic the tops and bottoms of the range. The MAE of any strategy is the price you pay to play. To anticipate the expected MAE of each individual trade would require a perfect reading of Volume profile and in a sense, know the intentions of the Bigger market participants. These fake breakouts are in fact the points of maximum pressure that big money will place among retail traders.

There is no fixed ATR stop that can be used within a mean reverting strategy to maximize profit. It will in fact only minimize loss at the cost of losing profit potential. This can and usually drives the strategy to failure.

I appreciate this perspective @WoodyFox! I'm not using a statistical based approach in the sense you are referring to. I don't use a long-term mean reversion strategy, or volume profile, and I certainly don't know the intentions of the bigger market participants...at any time. () So I can't really speak to stop placement within the context of that approach.

Without getting too nuanced...mostly due to the limitations of my ability to communicate clearly with a keyboard (). I use price behavior, price-action, to help identify when the market might go x-ticks in one direction, before it goes x-ticks (or sometimes y-ticks) in the other direction. And probably on a smaller time-frame than you are referring to. So, in the context of a trading range I'm not really trying to participate in a reversion to a statistically significant area. I'm looking for clues that one side of the market is exhausted, or has capitulated to whatever degree.

I've always had a lot of respect for traders that use a purely statistical based approach. And I always seem to learn from traders when they talk about the markets in that way, because it's not how I normally describe the markets. .

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  #27 (permalink)
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RT777 View Post
You're welcome I enjoy the discussion! I wrote a bunch of different stop/target systems and for years I tried testing all the different combinations. After years of seeing the same behavior I pretty much leave the stop as fixed and the target as inward trailing. I still keep the functionality to test different ways in hope that one day I'll figure a super great trending system that works well with a trailing stop. But so far no such luck. I've also been able to test my system with multiple entries which I consider averaging, not martingale lol. Some products appear to have a significant benefit to multiple entries up to a limit typically of only 2-3 signals max. After that the results become nebulous at best. I also find that the more volatile a product is, the worse it is to add contracts and you're probably better off limiting entries to just 1 or 2.

I've often wondered if this is particular to my algo or more of a statistical reality in the markets...so much to test so little time

I don't like the words random or noise but depending on the time frame thats what it can become if you (or your algo) places orders too close to play out. I believe that is part of it.

One if my greatest finds for me when learning to code was the "switch" function. You add the switch as an indicator and test a ton of variables by just changing the indicator number corresponding to the switch.

The reason this is UNBELIEVABLY AMAZING is you can change unlimited switches with unlimited sets of instructions in each. So you can test variables when they change with other variables. Just crazy.

Like a bad infomercial... IT GETS EVEN BETTER... LOL... You can test thousands upon thousands of iterations that are so far superior then hard coding each one... and maybe impossible due to all the iterations necessary to test each one. Code that would take millions of line of code can be done in few hundred. You run a test and let the software run through each switch combination.

Test iteration 1

Switch1-1
Switch2-1
Switch3-1
Switch4-1
Switch5-1

Test iteration 2

Switch1-2
Switch2-1
Switch3-1
Switch4-1
Switch5-1

Test iteration 10358

Switch1-9
Switch2-4
Switch3-2
Switch4-4
Switch5-7

Test iteration 2973543...

So your algos switches say if your in a strong trend and it keeps trailing stops going until it starts to range then your switches change your algo to buy low sell high, then when it breaks out of range it switches algo to one sided trading... spike, switch... channel, switch... back into ranges, switch.

To me that was the holy grail of coding. But also at that point it became clearly obvious I am not a good enough programmer and I had no intention of going down that rabbit hole. But man I LEARNED ALOT!

So after all that the best I think we can do is use a switch function to find the best variables to switch between trending or not and then have different algos kick in under each different switch regime.... hard trending... trading range... protracted trend or range... ect.

As for scaling thats just adds another level of complexity. But for me I like to scale only to improve my average only if it makes sense and then take off and try to bring average down but stay within target zones and one last contract if I think the market will go AND my stops ar above break even.

I hope all this makes sense. You might already know all this but hopefully someone might something of use here.




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  #28 (permalink)
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eilanzier View Post
This is the continuation thread where we further discuss about the pros and cons of fixed stop vs trailing stop.

I have gathered some bsck test data, it seems that fixed stop may get you more profit but its challenging to watch your trade go against you without doing anything when you had the advantage

For trailing stop, profit may tend to be lesser due to being stop out but you do capture a fraction of profit. But the challenge is usually price is going in your favor but you are stopped out too early.

The above is even more complicated when you are trading only with 1 lot.

Well how do you guys manage your trade? Feel free to share



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eilanzier,

I trade 3 minute charts only. Price action. I trade one contract to keep things simple.

I trade 1 contract because it is easier for testing purpose and keeps me simple.

I am back testing both trade management styles. Fixed Profit targets and Trailing Methods.

I always use Fixed Stop loss per trade when I enter. Sometimes I set a Profit Target and something I let the trade run and use my trailing stop method to gain more profit. It all depends on market conditions at the time.

I use profit targets, and make money, I loook for one more trade.

I prefer fixed stops

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  #29 (permalink)
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RT777 View Post
There are definite pro's and con's to doing this. Also too I couldn't do it without the help of an algo. For those that expressed an interest I'm providing a screenshot of a typical 'good' setup. In this case I have a cluster of possible short entries on NQ in the range of 9473.75 to 9477.50. Depending on what other lines I have on other products I do have to make a decision how I want to scale in. Also too note there is a second cluster above 9500. If I feel lucky I'd take the first set of entries. Also you'll see at the top of the screen I have developed a preset number of entries/stops and exits. For the most part I can get in/out very quickly with 1 click. Most of the time I could enter these directly into the broker software but often enough having these buttons available immediately to either get in or out asap has also proven to be valuable. Once the number are hit the stops and target will show up on the screen, although I already have a sense of what they will be from other info on my screen.


This is way too complicated. I use one naked chart and a footprint chart. Just my opinion.

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