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I probably would have lost a lot of money! Even with a tight stop, as you probably know, my stop market order would have probably been filled much higher than where I had it. And if I used a stop limit order then my stop may never be filled at all. These are dangerous trades indeed! I experimented with going short ahead of news in one account, and long in another, kind of like a straddle, but the fact that you can't get a guaranteed fill at your stop level, especially when the market is moving that fast, pretty much kills that idea.
Look what natty did today's inventories on the 1min bar! Yikes, glad I stayed away!
I'm becoming more convinced that good trading is more about money management and not great entries. I've always heard that, and for a while I've felt that, but I haven't really studied money management as much as I should until lately. As an experiment I've written a strategy that takes random entries and am trying to develop MM algorithms that can increase the strategy's performance with good money management, just as an exercise to myself how important money management is. In particular, I am focusing on stop and target calculations based on ATR and risk/reward profiles, how far and when to move stops, not using targets and instead using signals to exit trades, limiting in at prices x% better than the closing bar's price when the signal was given, when to cancel unfilled orders, etc.
For example, here are 2 losing trades that I took this morning that I felt pretty good about (huh?), you can be the judge. Initial stop = 9ticks, target = 24ticks, I start moving stops at +3 tick intervals, B/E at +12 ticks and aggressively lock in targets beyond that. Both trades hit +11 ticks before stopping me out for a -4 tick loss each. The arrows are from an indicator I wrote and I generally take the arrows in the direction of the VWMA. I could get 4 more losers like this, then get a full 24-tick winner and still be even on the day (not counting commissions)
So, here's one interesting way to trail a trade. I'm sure I'm not the only one that's thought of this so excuse me if I'm repeating someone else's thoughts/work. The idea: have a fixed reward/risk ratio (RRR) in mind, and keep that ratio in-tact throughout the trade. This assumes you have a profit target level that you expect/hope to reach.
In this example, I'm willing to risk 8 ticks to make 24 (24/8 = 3.0 RRR). Notice how at +6 ticks I go break-even, because when I have achieved 6ticks of profit, I only have 18 ticks left of potential reward, and so I can only risk 6 ticks (+6 ticks of profit -6 ticks stop level below current price = break-even) to keep 3.0 RRR. As it gets close to +24 the stop gets really tight and the odds of getting stopped out at some level less than +24 becomes much higher, but profit is more aggressively locked in.
The thesis is that one should keep their RRR in tact through the entire trade. If you have that RRR when you put the trade on, why risk more later on when profit is achieved? How many +20 trades have you "let breathe" only to turn around and stop you out at +12 or +7 (or worse) because you wanted those last 4 ticks? I'm not sure that's a sustainable way to trade.
Again, this only applies to trades with fixed targets/stops. Letting trades run is for another post.
I've been SIM trading the static risk/reward approach and I've liked the results so far. At first I was trying to keep the RR in balance manually but it's too hard to do the math real-time. I created a spreadsheet that I fill out to tell me where my stops should be based on where price goes (see attached). I just enter my entry price, direction (-1 = short, +1 = long) and my risk/reward parameters (in terms of ticks) and the area on the right is calculated forme. I'd like to eventually create a strategy or indicator to draw a line where my stop should be, but I'd have to see how I can do that with a trade I entered into manually. Ideally, I'd like the trade to be managed automatically for me, like an ATM.
This is an example of a short trade I took on CL this morning. I was using the ATR(5) on a 5-min chart for initial risk amounts, wanting to keep a reward ratio of 2.0. I was adjusting stops at every 4 ticks of gain instead of every tick in order to give it a little more breathing room on the way down. This trade stopped out -2 ticks, before turning back down again, so it was a small loser and I got stopped out sooner than it should have, but I don't mind a 2-tick loss. The trade previous was +29 ticks with risk=40/reward=80. I had some good trades on Friday as well, was up +60 ticks on the day, again on SIM so not worth getting too excited about.
I waited for the FOMC minutes to come out, watched the ES wiggle around on the 4-range chart for about 5 minutes and waited for what looked like to be a trend with downside momentum emerge. I went short and got my full 10pt target hit very quickly.
Around the same time I shorted gold. I got a move but it turned around and went the other way, but I was able to squeeze out 29 ticks before it turned around using my static risk/reward approach.
We had a huge gap down, followed by a large move up at the open, looked to get short after a $TICK extreme of 1320, went short once we penetrated the the low of the exhaustion bar, looked to get out at the 61% retracement area, targeted 6pts with 5pt initial stop, trailed it on the way down.
