First, Jeff and Cunparis, thanks for helpful, clear answers. I love the way so many of you guys can boil complicated things down into no-nonsense, simple sentences. (Not one of my talents!)
"evaluating the risk of a trade and making sure risk is acceptable. This includes not only stop & target, but also is the stop too big, are we in chop, is it a no trade zone, is there S/R nearby before your target, is the move already very extended, etc."
Yes, this is what I am working on now.
Risk for me is three things combined:
what stop is reasonable in terms of:
a) market action
b) account size (i.e. 1% max risk per trade etc.)
c) probability of profit target AND the ratio of PT to risk.
So I am looking for setups where my max stop is in a place that seems reasonable (i.e. below a recent swing, has cover with heavy volume levels etc.) and also that have clear profit target areas that I can reasonably expect the market to reach with this setup. Then if the ratio of risk to reward is better than 1 to 1.5, preferably 2, it's a 'go' OR I enter on limit at price closer to stop in order to improve the RR ratio. Sometimes only 3-4 ticks makes a significant difference in that R-R ratio.
1-2 (risk to reward) means that you can make back two losers in one winner. Many like to trade 1-3 so that one winner makes back 3 losers.
The problem with the 11 tick stop 6 tick PT approach is that when it works, it's fine. But when it doesn't you have to have two winners in a row (net of commissions) to make back one loser. If you have 2 losers then you need 4 winners in a row or 2 doubled-up winners. If 3 losers (which often happens) you need 6 winners in a row (which doesn't).
To me that is the issue.
I had never read Tharp's 1 car 1% suggestion before but that is exactly what I have been doing myself although I do sometimes put on two cars in separate entries whose combined risk is at or within 2-3 ticks of my usual risk, i.e. I don't double the risk. It is actually much harder to trade single lots but if you can become consistently profitable trading single lots, then the rest is just simple math as you increase contract size, let one out of three be a runner to pull in far more profits on those occasional big moves etc.
I had another 'money management' thought this morning on waking up having studied a 'rat' type approach using renkos last night. (see pic).
If I was an ATM I would think that range and renko charts were made to show people how I think. Take a typical Renko, which is a cross between Point and Figure and Range. A 5 bar Renko, say, needs to move 5 ticks higher than previous close to form and then the 6th tick up starts the new bar. To reverse, it has to go down 10 ticks from the previous close. Now it could first go up 5 ticks but not get to the 6th tick before going down 15 ticks from the High to end up 10 ticks below the previous close. If it goes down one more tick, that is 11 ticks below the previous close.
Now you know this as soon as the first tick of a new bar opens up. Basis the previous close you already know the high and low of the bar. (the same is true of range bars).
Now, back to the ATM talking: ' a '5 bar' Renko is simply an 11 tick initial stop (assuming opening tick is 1 tick above high of previous bar for long entries) with the stop moving up 5 ticks in 5 tick steps.'
You can set that up in an ATM. With range bars, which don't have Renko's reversing rules, it's just one tick bigger than the range bar's range basis the open of the Range Bar (I think that's right with range bars. I'm pretty sure that's right with Range-Alt bars. ) But whatever it is, you can put that in the ATM. If you enter on a new bar which is one tick higher than previous, your stop can be one tick below that new bar and you already know the minimum low that price will be from the opening tick (or you can make it 2 bars against you for stop out). Etc.
So people often talk about how Range and Renkos smooth things out, identify trends etc. which seems to be true. But also I think they are very helpful for looking at historical charts whilst researching in order to get a very clear money management read since you can play around with different bar sizes to see what works best.
Really, and especially with Renko, they could be called 'money management bars'.
I made an indicator (in pic) which shows stop and/or entry as each bar closes and plots (with displacement of 1) on the current bar. So it plots like your ATM could be set up to handle the trade.
This indicator knows if it's a Range, Range Alt or Renko. I also have a Range-Bar High Low indicator that plots the current max poss high or low (although with the other one this is not really necessary). I want to run the indicator for a day or two before sharing it to make sure it works. But the RangeBarHighLow seems fine and I attach it now. It's just a utility that plots on current bar the max poss high or low and changes tick by tick if the high or low has changed. Handy for placing stops or entries and works with Range, RangeAlt, Renko, SBS Renko and Median Renko and at some point I'll figure out how to get it to work with Point and Figure (by Roonius) which basically reverses similar to Renko but doesn't plot a new bar if the price keeps going in the same direction without reversing (3x box size). PF goes even further than Range or Renko to take time out of it and makes very clear trend and SR levels more than any other bar format I think.
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Holy S...! Gold up to 1180 overnight. Asians pushing it up again. Yanks try to push it down during the day, then while we are asleep, up she goes! Runaway bull at last for now. My guess is 1250 soon, then back to 1000, then 1500. Nice round numbers. But guess is the right word.
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I'll share with you one thing that has really helped me: If a strategy is proven to be consistent, the most important thing is expectancy, which is the avg win per trade. The win % and R:R ratio are not relevant by themselves. You can have 70% win rate and 1:3 reward:risk, or 40% win rate with 3:1 reward:risk, it doesn't matter. One more thing I've found is that high reward:risk trades usually have a low win rate. I have not seen a method capable of consistently producing a 3:1 ratio & > 66% win rate. it's almost always one or the other.
I personally use different ratios. For longer term trades (for me 5-15 minutes) I usually put my target = to my stop and sometimes will drag it out a bit (or I start with a target greater and will drag it in if needed). For longer term trades (for me 5-15 minutes) I prefer to exit on a stop or reversal rather than a target.
For scalping, it's totally different. Here i use a stop that is out of the way. What I'm using today is 4 target 10 stop. the stop is really catastrophic. I will move it closer when I can or just plain bail if I don't like what I see. So you might see that and think the R:R ratio is terrible but if the win rate is high enough it doesn't matter. Lately I've had a few 100% days so I'm confident I can achieve a high win rate.
So R:R really depends on the market, the timeframe, the trading style, and the personality of the trader. If you lock yourself into looking for a set ratio you may be missing out on good opportunities.
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You mean you wait for the new bar to form (say old bar High + tick) then place limit at that price?
I tend to go with 1 tick stop limits for most things because that way I just don't have to be so fast. To me one of the advantages of the range bars is you have lots of ahead notice of where the high/low is going to be (most bars). If it's so fast that you don't have notice, that's sort of good even if you don't get the best possible price because chances are, if you have scalping type PT's, your already out before you knew you just got filled!
Cunparis: that is a VERY VERY helpful post for me about the RR business. I am definitely lurching around a bit trying to figure this out in a way that becomes second nature during trading and strategizing approaches before entering. Thank you.
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What I meant was that I decide to enter on a break of a high or low. ALWAYS. No exceptions. so I don't care about the current bar's close, I have my stop waiting 1 or more ticks above the high of the bar. Sometimes it takes a few bars to take out that high, that's ok my order is in. On a 5m chart it sometimes happens that my buy stop is sitting there for 5-15 minutes.
If I understand correctly, it sounds like you're talking about waiting for the bar to complete and then putting the stop 1 tick above it's close. Is that correct? If so I have some comments on that.
I'm glad you found it helpful. I think it's very important. Also the R:R criteria can be determined in advance and then the trade meets your criteria or it doesn't. That keeps things simple.
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I was just at the TradersExpo in Vegas and Fidelity gave a presentation about the best traders. They did a study from 1998 - early 2000 (bull) and compared it to 2000 - 2003 (bear). They found the best traders over both timeframes had about a 33% win rate. They had small losing trades and huge winning trades. Their point was to manage the losses and let the winners run.
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