sloth 

Woody, 45 points would absolutely be a wide stop in NQ. That's nearly 1/3rd of a daily ATR these days. I'm trying to understand the basis for your belief that trading ranges somehow requires suffering greater MAE? Perhaps in back tests of simple mechanical models this is true. The ES and NQ are both mean reverting markets, as you mentioned. (Technically, they aren't because there isn't a stable distribution, but that's a topic for another thread.) IRL, (to borrow from the kids) reversals happen very quickly. We can objectively quantify and observe when stops are getting triggered and when those orders are getting absorbed. We can also objectively observe and quantify when a stop run has run it's course with a relatively high degree of certainty. Old school tape readers have been doing this for centuries. Newer traders can lean on things like MBO data and delta figures. This might sound overly simplistic - but how many new traders do some analysis, identify the trend, enter a trade and place a stop. Mysteriously the market creeps lower and lower and lower, suddenly accelerates, triggers their stop and abruptly reverses and does precisely what they anticipated in the first place while they sit from the sidelines and watch? Was their stop too tight? NO! Most likely, their entry was terrible. Too far / too many ATRs from where the market absolutely should not go if the basic premise of the trade is valid. Traders love to wait for some sort of technical confirmation. A breakout of a 5 minute bull candle or the second bull candle or whatever. Meanwhile, they're entering 2 ATRs on that timeframe above the recent pivot or climax low. The market gives a little retest, they get stopped (again), and then they kick the dog and start searching YouTube for conspiracy theory videos. If you are the guy on the other side of the trade when some kid who just installed RobinHood on their brand new iPhone 12 taps out of their latest impulsive purchase- you don't need a wide stop. That's my paradigm. I appreciate the discussion. I certainly don't have all the answers - just some observations of what works for me based on reviewing trades, learning from both winning trades and losses.

Just to clarify...

The ES and NQ are only mean reverting markets by time perspective. (I said you could treat them as mean reverting). This is a matter of timeframe as the OP was curious of...so both trend and mean reverting strategies exist in both markets.

Also,
45 points (rounded) in NQ is one quarter of the implied standard deviation move.

13985.75*19.16/15.874/100*.25 = 42.2 (Black Scholes Model)

This would not be a wide stop, but a calculated one, for any trader looking to profit from a longer timeframe. Add in some Options or spreads to hedge with and voila, where did my stop go?


From a purely technical view, MAE is certainly a driving determinate when choosing a mean reverting strategy. (As I said, stops usually kill a good mean reverting strategy)


This is all my prospective from a full technical side...I believe you may be a discretionary trader as to the way you view the market. Just guessing.

Either way, Stops are all about perspective and are related closely with trading timeframes.
JMHO

WoodyFox 

Just to clarify... The ES and NQ are only mean reverting markets by time perspective. (I said you could treat them as mean reverting). This is a matter of timeframe as the OP was curious of...so both trend and mean reverting strategies exist in both markets. Also, 45 points (rounded) in NQ is one quarter of the implied standard deviation move. 13985.75*19.16/15.874/100*.25 = 42.2 (Black Scholes Model) This would not be a wide stop, but a calculated one, for any trader looking to profit from a longer timeframe. Add in some Options or spreads to hedge with and voila, where did my stop go? From a purely technical view, MAE is certainly a driving determinate when choosing a mean reverting strategy. (As I said, stops usually kill a good mean reverting strategy) This is all my prospective from a full technical side...I believe you may be a discretionary trader as to the way you view the market. Just guessing. Either way, Stops are all about perspective and are related closely with trading timeframes. JMHO

Hi Woody,
Yes, I am a discretionary trader. Things didn’t start out that way. I spent the first 6-8 years creating, testing, and refining various algorithms. It seemed like the most robust concepts were the simplest and based on a handful basic principles.

I eventually abandoned trading in a 100% mechanical manner for two reasons. First, they required large stops to implement successfully. Second, most algos have drawdowns and periods of underperformance that I just don’t care to sit through.

Yes, people like to use std dev as measurement of risk, traders and investors alike. And yes, STD DEV will scale roughly at the square root of time. So, it seems very logical that a stop should scale with the square root of time as well.

In theory, this makes sense. In practice there are exceptions. Here’s an example: It’s fairly widely known that during the pit trading hours, ES and NQ will make the high or low for the session during the first 30 minutes of trading more often than any other half hour. Take the NQ, so far this month it has made the high or low for the pit session in the first 30 minutes 66% of trading days. Throw in some additional criteria and you can increase the odds that a day will make the high or low quickly.

The high or low on those days in NQ has averaged around 30 points above or below the open. A skilled professional can do better than that in terms of adverse excursion. Meanwhile, the daily ATR has been running around 200 points. Certainly some opportunities for 5R trades and greater if you get the main idea for the day right.

What does that have to do with this conversation? Both regarding what time frame to trade and stop size - A lot. This time of day phenomenon doesn’t change whether a trader is using a 5 min, 15min, or hourly time frame. It’s a static point. The fact that trader A is going to hold the position for 5 minutes and trader B is going to hold it for an hour and trader C is going to hold the trade for a couple days doesn’t change this. They all can initiate the trade at the same location with the same initial risk. Trader C doesn’t have to use a stop that’s 2x greater than trader A or whatever because he’s going to hold it longer.
IMHO, it’s a lot easier to make large R multiple trades this way. Find a low risk inflection point with the opportunity for symmetrical returns. So, to return to the OP’s question. I’d suggest using a timeframe that allows you to hold on to trades as long as possible within what’s comfortable for you. This is the only way to occasionally make trades that earn 5x or more times your initial risk. In my experience, it’s a lot easier to be profitable in this manner than relying on a high win rate on a very short timeframe. Others might have a different experience.

sloth 

Hi Woody, Yes, I am a discretionary trader. Things didn’t start out that way. I spent the first 6-8 years creating, testing, and refining various algorithms. It seemed like the most robust concepts were the simplest and based on a handful basic principles. I eventually abandoned trading in a 100% mechanical manner for two reasons. First, they required large stops to implement successfully. Second, most algos have drawdowns and periods of underperformance that I just don’t care to sit through. Yes, people like to use std dev as measurement of risk, traders and investors alike. And yes, STD DEV will scale roughly at the square root of time. So, it seems very logical that a stop should scale with the square root of time as well. In theory, this makes sense. In practice there are exceptions. Here’s an example: It’s fairly widely known that during the pit trading hours, ES and NQ will make the high or low for the session during the first 30 minutes of trading more often than any other half hour. Take the NQ, so far this month it has made the high or low for the pit session in the first 30 minutes 66% of trading days. Throw in some additional criteria and you can increase the odds that a day will make the high or low quickly. The high or low on those days in NQ has averaged around 30 points above or below the open. A skilled professional can do better than that in terms of adverse excursion. Meanwhile, the daily ATR has been running around 200 points. Certainly some opportunities for 5R trades and greater if you get the main idea for the day right. What does that have to do with this conversation? Both regarding what time frame to trade and stop size - A lot. This time of day phenomenon doesn’t change whether a trader is using a 5 min, 15min, or hourly time frame. It’s a static point. The fact that trader A is going to hold the position for 5 minutes and trader B is going to hold it for an hour and trader C is going to hold the trade for a couple days doesn’t change this. They all can initiate the trade at the same location with the same initial risk. Trader C doesn’t have to use a stop that’s 2x greater than trader A or whatever because he’s going to hold it longer. IMHO, it’s a lot easier to make large R multiple trades this way. Find a low risk inflection point with the opportunity for symmetrical returns. So, to return to the OP’s question. I’d suggest using a timeframe that allows you to hold on to trades as long as possible within what’s comfortable for you. This is the only way to occasionally make trades that earn 5x or more times your initial risk. In my experience, it’s a lot easier to be profitable in this manner than relying on a high win rate on a very short timeframe. Others might have a different experience.

Bingo!
I figured you were a discretionary trader.

Well if its not systematic were I can program or have it programed...I'm not interested.

I work with proven and profitable systematic systems that work with technical aspects only. I do not like being tied to a computer all day looking for that right setup (were the stars align).

My typical trading day consists of checking in on strategies and the rest of the time I exercise, work in the yard, do stuff with the kids, clean the cars, etc. Somedays I will choose to data mine and look for better strategies. Its that simple for me.

You are a discretionary trader and that's great...I respect that.

But Discretionary trading is just not for me (Wide stops or not).

Good Luck in your trading.

let me preface this by saying if I knew it all I wouldn't be here :...I agree w using higher time frames to avoid noise. A trader I respect uses nothing lower than 30 minute. Another one uses day charts to get a general picture of market direction and hourly charts to find entries. Along the same topic, I wonder what moving averages others use? I use SMA 8,20,50 and 150. If you put these up on a 30 min chart vs a day chart you can get a different idea about market direction and make some bad decisions. I think the day chart moving averages give better information to make decisions.

Bel

67belvedere 

let me preface this by saying if I knew it all I wouldn't be here :...I agree w using higher time frames to avoid noise. A trader I respect uses nothing lower than 30 minute. Another one uses day charts to get a general picture of market direction and hourly charts to find entries. Along the same topic, I wonder what moving averages others use? I use SMA 8,20,50 and 150. If you put these up on a 30 min chart vs a day chart you can get a different idea about market direction and make some bad decisions. I think the day chart moving averages give better information to make decisions. Bel

Greetings! You are correct only in regards to your own perception and/or strategy. In your mind you want to hold a trade for hours/days which is great. Not for me or many others.

The lower time frames such as 30 seconds, 1 minute, 5 minutes, 5 range, etc. and etc. are not noise. Yes, there can be chop, which plainly visible and can be avoided. Other than that, for scalpers, the fast time frames provide good opportunities.

For instance, on the NQ today, there was a movement of 50 points on one 5 minute candle and 66 points on 3- 5 minute consecutive candles. 50x2 NQ contracts = $2000.00. Take even half of that movement most retail traders would be happy to shut the computer off and go mow the lawn.

When you can get a 17 point move in 45 seconds (17x$40. = $680.00), sounds like good noise to me.

I am not criticizing you for your own methodology but only wish to point out the benefits of faster time frames the many utilize.

I am only stating that any time frame is good when you have overall strategy that fits it.

Like Al Brooks stated, "there's lots of movement in 1-five minute candle".

I will keep a 15 minute chart up so I can spot way oversold and way overbought potential as was presented today at the open on the NQ. Using a 20/200 SMA, some great opportunities availed themselves. Chart used to enter: 5 Range.

Value of any chart is in the eye of the beholder. Just for info sake, three of the biggest scalpers in the business use 2 minute or 5 minute charts to make their decisions.

Much success to you!

LOL how I define myself (not others) is that I am, for 20+ years, a discretionary technical trader who uses relatively speaking tight stops because I want to know in no uncertain terms when I am wrong. Of course stops are adjusted if and when prices moves in my favor. Nothing complicated beyond watching PA - current PA.

"Happy, happy, joy, joy."

Redbarn,
Very interesting. For those using a 5 min chart and 20/200 MA crossover, where are stops placed ? Do you use an ATR multiple to place stops? Does volume play a role in decision making? I like to learn from successful people, not ashamed to be unoriginal I struggle with picking a direction and setting a protective stop.

Many thanks for your insights!

- Bel

67belvedere 

Redbarn, Very interesting. For those using a 5 min chart and 20/200 MA crossover, where are stops placed ? Do you use an ATR multiple to place stops? Does volume play a role in decision making? I like to learn from successful people, not ashamed to be unoriginal I struggle with picking a direction and setting a protective stop. Many thanks for your insights! - Bel

Good morning,

I don't use ATR, though I have looked into it's relevance.

Also, I don't trade a crossover as they are mostly lagging except to view price's relationship to the 20 and the 200.

The study of those 2 moving averages can provide some good insight toward probabilities.

For an exercise, you might sit a study the 5 minute, 20/200 chart.

How does price behave when the averages are close, far apart. When price is far from the 20 and the 200.

I keep a loose stop, however, I start the trade with small contract sizing.

I don't buy when price is far from the 20 and the 200 in an uptrend. Opposite for shorts.

A term that I like is "at or near the 20". Trade in the directions of the ma's. If you are like me, you will find something that seems comfortable to you. Make error after error until, you work out the kinks. Find your weaknesses etc.

I like the 20/200 tips that Oliver Velez presents in his videos. They regard stocks and not futures, but they do have relevance.

I have had to appropriate different traders concepts then roll them into how my mind works.

In regards to small time frames, have you checked out Lance Stranahan's "Beast Slayer" on this site.

Here is a link to his trades that he posts here and on youtube

Best regards in finding your own path in this journey!

Thank you !! Ill check out those items...

67belvedere 

Thank you !! Ill check out those items...

You're welcome.

In regards to the MA's, I use exponential as my trades last 2-10 minutes usually. Sometimes less sometimes more. Simple MA's don't give me the info I need for the type of trading I do.

In regards to taking a trade (for me), a crossover is worthless. That crossover is so lagging! It's the relationship of price to those EMA's that provide me with info.

You can see the chart below how taking a trade based on a crossover would kill you.

It's easier for me to link a chart using Tradingview than my NT8 platform as my trading computer is a standalone PC and I don't like to access the internet with it so I grabbed this chart off of my old PC.

Hope this helps clarify things.

https://tvc-invdn-com.akamaized.net/data/tvc_05d0ac6cac131b336c99bc370d955648.png

In this chart, where the 20 is below the 200, I would start looking for a short "near or at the 20 EMA". Look for supply and demand areas at that spot.

To me, that location for a short would be a higher probability area. Also, when price was down at that 13975 area, I would not have been looking for a short but find a reason to buy as price was very far from the 20. I call the 20 the "mean".

These are just my thoughts.

Best regards!