This is the first thread that I am starting here on Future.io so before I get into it, I wanted to say thanks to Big Mike and the whole Futures.io community. I have soaked in a lot information from this great forum and I am grateful for all of you whom have shared your experiences so that we can keep learning.
Also, please keep in mind that this is my unorthodox approach to this risk reward topic. Use at your own risk. I just wanted to share how I personally devise a risk reward strategy before going live. This method works very well for me but may not work for you or your style of trading. There are many creative ways to look at things when devising a risk reward strategy and this is just another one of those.
The same question pops all the time: What is the best Risk Reward Ratio? But is that the right question?
At one time or another most traders will ask themselves that very same question. And honestly, it’s a tough one to answer considering all the different variables involved with trading. But there is (at least I feel) a way to answer this question, but from a different perspective. One that does not directly focus on the risk part at all, at first.
I trade the NQ and I do not use stop losses. However, I do have a 50-pt catastrophic stop loss, but I do not include it when building and back testing a strategy. More on that later.
One of my strategies is where I shoot for a 10-pt profit target. Back in the day, I also tried the 1:1, but it wasn't until I completely removed the common “risk reward" stop loss that I went to an 85%+ win rate on the strategy alone. I also managed to pick up another ±10% of profitability bumping it up to a ± 95% win rate, which I’ll also explain later.
So why no stop loss is better? For two reasons. Your trade needs breathing room, and you have to account for running of stops.
Let's hypothetically say that you have insider information telling you that the price is headed to an important price level. Well, even though you now know where it's going, I’m sure you can agree that it will not get there in a in a straight line. Instead, there will be many peaks and valleys along the way. Those peaks and valleys are designed to take your money while in transit to that important price level.
The key for me is having a fully back tested strategy that is proven successful during normal market conditions but without having any stop loss. That’s right, no conventional stop loss. With that said, a stop loss does needs to be part of your strategy, but it should not get in the way of making profit. Instead, it should help you when you truly need it.
Try this. Back test your strategy with no stop loss at all, and see if your trade would actually reach your profit target. Don't pay attention to the actual loss amount for now. If your trade wins vs losses percentage is bad, then your strategy was bad from the start and needs to be either optimized or scrapped all together. For me personally, if a new strategy that I created cannot get good back testing results without a stop loss, then I didn’t work hard enough on that strategy.
In trading, talk is cheap, so I wanted to share the 60-day back testing results on a strategy I created using 3 NQ contracts.
Strategy Performance report #1 shows my strategy results without any stop losses used. The Strategy Performance report #2 of the same strategy are the results of a 1:1 risk reward ratio. I know what you’re thinking; what about using a 1:2, or 1:3 ratio, or, 2:2, or 3:3 ratio? Been there done tested that, none of them work. At least not for this specific strategy.
Two points I want to cover from earlier. One is that 50-pt stop loss. When testing a strategy, I do not include it into the strategy building because it’s just like the 1:1, or 1:2, it doesn’t work and it would falsely skew my results into negative territory where I would believe that my strategy either sucks or just flat out doesn’t work. This is clearly demonstrated with Strategy Performance report #2 when using 1:1. The 50-pt stop is only there for catastrophic reasons during live trading.
Secondly, how do I squeeze another ±10% of profit and avoid those drawdowns? Looking at Strategy Performance report #1 (without stop loss), you will see the number of wins and losses. Well, there are only 30 losses. I don’t know about you, but that’s very few, and they are typically similar in nature. At least that’s my experience. So, all I needed to do now is to identify the reasons why those trades went wrong, then I know what to look for on the chart to prevent the bad trade from even being taken in the first place.
As opposed to Strategy Performance report #2, and trying to figure out the whopping 209 bad trades with a 1:1 ratio. But worst yet, think that my strategy sucks and dumping it.
In closing. I think the question is not, “What is the best Risk Reward Ratio?” The question is, “How good is my strategy, without a stop loss?”
Thoughts? Questions?
Happy Trading!
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If you make your target and stop variables in the strategy you can have ninjatrader iterate across the different combinations to find the best one. Of course, this is curve fitting, but it's still an interesting exercise.
You'll find that increasing your stop almost always increases the strategy's performance. So why doesn't everyone do this? Well that's falling victim to one of the most common backtesting issues. Real world performance does not match backtesting performance. So even if you bactested across 5 years or more of data, there's a good chance of this kind of strategy blowing up if you go live. I don't know how exactly the market sniffs out your weakness, but they do it every time. I can't tell you how many traders I've seen trading in such a manner blow out in a single day. You'd think that a run of 10 or more losers in a row would be extremely unlikely but I've seen it more times than I can count.
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Sorry for the late response. Yes, I agree with you that if I were to use the same strategy going back 5 years it would not work. No strategy will. But that doesn’t mean your strategy is the problem.
Once a successful strategy is created, you still have to manage it, to keep it successful.
When I first created the strategy with the 87%-win rate (first post of this thread), I did a 3 year no stop loss backtest for two reasons. One, to know if the strategy worked way back when, and two, to know how to adjust the strategy to make it work during different times of the year as well as different market conditions. Once I figured that out, I was able to regain a win rate around the same percentage.
I guess you can call this part two to my exercise.
My method is to use a 3 period ATR, not a 14 period. The first thing I look at before trading is my ATR. When the ATR tells me that the last 3 bars are 1-3pts, my target is 2.5pts, 4-6pts my target is 5 pts, 7-10pts my target is 10pts, and if for example like in March 2020, the ATR read 20-30pts per bar, my target was 25pts.
I don’t want to go over the top and go through 5 years of backtesting because it is unnecessary. However, I am going to show you the validity of my point by demonstrating the performance of my strategy of 60 days in 2020 vs same 60 days in 2019 and how adjusting the target gave me a similar win rate in 2019 as in 2020.
Strategy Performance report #1 is 2019 with the 2020 profit target of 10pts. As you can see, the win rate for 2019 is not good. For Strategy Performance report #2, I have adjusted the target according to my ATR formula to fit the 2019 market conditions which is 2.5pts, and there you go 89%. As you already know, you cannot expect the same size wins or losses throughout the whole year, but with some minor adjustments to your targets, your strategy will work all the time as long as it is solid.
This holds true for bad strategies too. If it’s bad strategy, it will have bad results even if you have no stop loss. The key point here is to determine whether your strategy has successful entry points. The rest can be figured out later. More about that below.
As you say, it is very seldom. However, I wouldn’t take that chance either. As I explained in the first post of this tread, the losses are so few that it is easier to go through them and see what went wrong and secondly, 95% of the time they are usually the same style of bad entries.
To remedy this, all you do is back the chart up a few bars to see what that bad entry looks like before it completely forms so that you can visually spot and avoid them from ever happening. Thus, eliminating those “no stop loss” losses and drawdowns.
There are typically more things happening behind the scenes when it comes to a strategy so I do apologize for not painting a full picture the first time. Hopefully this clarifies things.
Anyways, this is what has been working for me. I just wanted to share my method of thinking so that it may help someone else figure things out whilst creating a strategy.
That's what we call curve fitting. Adjusting to fit the data that happened in the past tells you nothing about how it will handle data in the future. We can't really even tell if the system has any edge outside of taking on excessive risk. It might have a high winrate, but that might be entirely due to having a wide stop.
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With all due respect, I have been using this particular strategy for 13 months, and I'm not here to argue with you about your way of seeing things. If you can't wrap your head around how this works, that doesn't mean it doesn't. I have seen other ways people trade and although I’ve been around since the dot com, I too cannot wrap my head around how they do it. But it works regardless of what I believe.
I’m not selling anything so I do not have to divulge my live strategy just to prove something to you. I posted this thread to for those who want to create a good or better strategy, but you have to have foresight. If you don’t, well my post is just not for you.
You have to understand that if I was to look at my current live strategy with your way of thinking, I would have dumped it thinking it doesn't work.
I will show you just 3 of the trades because I can't fit the whole chart with all 9 trades on Friday, it would be too squashed and not legible. For your inquisitive pleasure, I've taken off all my indicators.
There is nothing form fitting about what you see. I'm just accurately reaching for 10pts, and I've used the very same method that I describe in my second post on how to avoid losses, as much as possible.
Just like I said before. If you have a crap strategy, you can remove the stop all you want, but you will still get the same crap results. It's not the stops.
Stop loss disclaimer: I am not encouraging to not use stop losses. What I am trying to present is a way of testing if a strategy can work, prior to implementing a stop strategy. Place stops where you feel comfortable. I have a stop, but it is where I feel comfortable. I encourage you to do the same.
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I think I understand exactly how it works, and it's something that I've seen countless times before. They're always so confident that it's a workable strategy, but they always come back and admit to me that they blew the account. It's not uncommon to get away with it for years at a time, but the account blowout always comes. Strangely enough it sounds like you've already done it before. You claim to be in since dot com periods, but you've only been using this strategy for a year. How did the last blowout happen?
This is a common pitfall, and I've seen it ruin a lot of traders. So I'm always going to warn traders against this when I see it publicly. There are severe risks associated with such strategies. Trader beware!
If there was anything "accurate" about your strategy you wouldn't need such a large stop.
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By the way, I was in my 30s when trading the dot com. I lost $5k in 5 minutes trading a company called Razor Fish. That was my first ever trade. That's when I decided to take the market on full time. So yeah, many things change over time, including when stock switched from fractions to decimals. Strategies change too.
I have many strategies, three of them I use every day. The reason I can make systematic trades is because computers account for the majority of market trades. If 100% of trades were done by humans, I'd be doing something else. There are no patterns in an emotional market. The more and more you stare at a screen, the more and more you see new patterns appear. I have quite a collection that I haven't even had the chance to test. The 13 month one is new. Most of the time I will replace a strategy that is harder to work with, with something easier like the 13 month one. Yes, the money is great, but for me it's more so the challenge of beating the market ever since I lost that first $5k. So, I come up with new strategies all the time.
You are painful to deal with. You could just ask, but you ask in a condescending manner. But I will answer and try to ignore your juvenile tone.
I never use stops, that’s my comfort, and I’m not alone. I have a large stop not because I don't trust the stratgy I built, it’s because I got bit trading stocks in 2010 by a flash crash. Today, I am not necessarily worried about another flash, but then again, I have seen a lot of crazy market moves, so I am aware that anything can happen, and that is the reason I have a 50pt catastrophic stop.
I added a small stop loss disclaimer on my second post to appease your warning cry to all traders.
Anyways, I hope you are done interviewing me. You’ve diluted my thread with YOUR religious trading beliefs, when in fact there are many ways to create and trade a strategy. I welcome questions but I do not welcome criticism of something you do not practice, or are closed minded about in the first place. You may not want to act as if you have all the answers. You are not the all mighty Gandhi of traders. No one is.
Now please TWDsje, if you have something worth my attention then ask away, but if you just want to just keep ragging on my methods with a smart-ass approach, then you’re not welcome.
As for anyone else, I am open for questions via direct message or here, so feel free to ask. I am happy to help in any way I can.
You'll never get a humble reply to the criticisms of such a strategy. The reason such traders employ these strategies is because it's too much for their ego to regularly take losses. There's nothing more to say about this other than trader beware!
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First, thank you so much for sharing your thoughts and backtest!
I am trading for 13 years (and still can't make it to profitability) I am profitable with my longer term bonds and stocks but with futures I keep struggling. But I promised myself I will make it before I die.. so never giving up
Recently I had similar thoughts.. I believe that my entries are good. I do see ES going my way for some time after I enter... however it would not reach 1:1 (or 1:2 etc) and stop me out, or stop me out quickly then go for many Rs... I am sure you get the point.
Now, with your great thread - it made me think again.. What if I try to work on high win rate instead... Just one question please -> you are saying that you do have a catastrophic stop of 50 points and on your NQ (9 trades) chart all your targets are 10 points.. Does that mean that your stop is only 5 times larger than target?? That is not too bad.. please clarify
Also, when you stuck in a trade that doesn't go your way but keeps going against you -> do you average down? I think second trade will help to get out of the first one (otherwise we are stuck with first trade for days....)
Hoping for any kind of input. Anyways, thank you so much for sharing your thoughts. Something for me to think about!
Hope you're joking. Making 10pts on profitable trades, losing 50pts on stop outs you would need a win rate greater than 83% just to break even. And that is before commissions. Averaging down would make those losses even larger so need an even higher win rate just to maintain your account balance. You're increasing your risk simply to try to scratch a trade. Placing trades with large risk and no potential profit isn't a successful way to make money.
Also he was talking about the NQ and that can move fifty points against you in a few minutes. You wouldn't be stuck in the trade for days.
You do not win as a trader, you just get to play again the next day. If that game doesn’t appeal to you then you should not trade. Gary Norden
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