It is good to have rules, especially if you can follow them. My only advice is to tailor these rules to the strategy you are trading. Rule #3, for example: it is common for even very good trading systems to have 2/3/4 losses in a row. Stopping trading at that point may only stop you from trading the next winner.
So, I recommend you develop the specifics of the rules along with the rest of your strategy, and then see how it has done historically. You may very well find that one or more of these rules takes away a lot of potential profit.
If you have any questions please send me a Private Message or use the futures.io "Ask Me Anything" thread
The following 2 users say Thank You to kevinkdog for this post:
When I see "small profit, small profit, small profit, large loss" it tells me you are either using a mental stop, in other words your not consistently using a hard stop order working in the market. In this case when the market trend breaks against your position, you let the losing trade run and run. Or, you are using a hard stop but with a wildly upside down win:loss ratio, the upside down thinking of risking 4 or 5 to make 1. Neither of these approaches is mathematically sound in any way, and they are and always will be net losing risk management strategies over the long term. None of us can wish or dream away the underlying math ensuring the failure of this strategy.
This is further confirmed to me when i read "a win rate pushing 70%", since I know if you were using 2:1 or 1:1 win:loss ratio and aiming for 3-4 ticks profit, and a hard 3-4 tick stop working in the market, you would never consistently achieve a 70% win rate. The 70% win rate is a temporarily comforting illusion produced by an upside down win:loss ratio.
Trade management is an optimization function, it requires finding a profitable balance of opposing forces pulling in opposite directions. For an ES scalper, the "tuff nut to crack" is finding the optimal balance between the win% and the average win/loss ratio. (Average win/loss ratio = Average $ won / Average $ lost). A good ES scalping system should produce an average win/loss ratio of 1.5 or higher, anything lower than 1.5 is at risk of eventual failure.
For example, if scalper Joey were to use a 12 tick stop loss and a 3 tick profit target, (a win:loss ratio of 1:4, risking 4 to make 1) his win % might be high (70-80%) because the stop would not get hit very often, but given enough time his Average Trade metric would always end up negative. In this case, a losing streak of just 2 trades (-24 ticks) would require 8 winning trades to get back to breakeven (not including commissions). A practical way of understanding how this works together is to view the win:loss ratio as a goal or target your trying to achieve, and the average win/loss ratio metric is the measure of how well you did managing your wins and loses in your actual trading performance.
In order to turn the average trade positive, scalper Joey would need to bring the win:loss ratio into balance, let's say 1:1 (fairly typical for an ES scalper) 4 tick profit target : 4 tick stop loss, which would then cause Joey's win% rate to drop back to 50% because over time the stop would be hit with the same frequency as the profit target. Mathematically a 1:1 with 50% win rate is also a net losing strategy, so something like a 1.5:1 at 50% will cross above the breakeven threshold, and a win:loss ratio of 2:1 (risking 1 to make 2) at 50% winners would provide the average ES scalper a little more (not much) breathing room.
So the question then becomes: can you devise and consistently adhere to an ES scalping strategy you can employ to produce a positive average win/loss performance metric, a positive average trade metric, and a 50% or better win rate at the same time ?
Last edited by trendwaves; September 7th, 2013 at 08:42 PM.
The following 5 users say Thank You to trendwaves for this post:
Thanks so much for the reply. I am using a stop on every trade but often times I move it down "just a bit". That's how my losers get out of hand. I usually place a 4 tick stop but I often move it. I lean towards a 1:1 risk reward and if I hold onto that hard stop I would occasionally get a bigger winner which would hopefully move my RR better than 1:1. It sounds from your post that you don't think much better than 50% win rate is possible over the long term. I like to think an edge would allow for a better than 50% win rate using a 1:1 RR. Thoughts?
The following user says Thank You to scalpingticks for this post:
A 4 tick stop in ES is tight, so I can certainly understand feeling the 'need' to soften it up a few ticks to give the new trade a little more breathing room to work out in your favor. I don't see that as a major problem, other than it will 'throw off' the math underlying the system expectancy.
Based on my experience scalping ES, using a 4 tick stop and a true 1:1 RR , it would be very hard to achieve better than a 60% win rate over time, meaning month in and month out. If your really good I think you could get into the high 50%'s , say 56-58%. I personally can consistently produce a 68-70% win rate scalping ES, BUT I can only do it with a wider 6-8 tick stop (inverted RR). Anything less than a 6 tick stop and my performance drops back below 60%.
Using a 1:1 RR, with 4 tick profit/stop, $4.50 RT commission, and 50% win rate, produces an negative expectancy of -$4.50, or a net loss of - $ 45.00 after 10 trades. Bumping the win rate up to 60% produces an average trade of +$5.50 or +$55.00 every 10 trades.
Maybe think of the problem from a different perspective. Setting aside everything else, what would a more reasonable stop be for your typical (average) trade setups ? 6 ticks , 8 ticks ? If the trade goes 6 ticks against your position then the probability of it recovering for a 4 tick win is ? It is a balancing act is between giving the trade the room and time it needs to work, where the integrity of the trade is still valid, but cutting the loss as soon as the trade setup clearly fails and your edge disappears.
So let's say in reality the 4 tick stop is just too tight, and your trade setup needs a 6 tick stop for this to work better (where the stop is far enough away so that it doesn't interfere with your trade setup). From this we would need to calculate the win% required for various profit targets in order to maintain a winning expectancy. Using a 4 tick profit target and a 6 tick hard stop with 60% win rate is a losing strategy (-$4.50). At 65% the 4/6 strategy crosses breakeven at +$1.75 ($17.50 per 10 trades), at 70% we jump to $8.00 ($80 per 10).
With all that said, it might be a good idea to break the habit of moving your stop once in a position. It will be better to settle on the stop size your comfortable with (obviously 4 ticks isn't it), then leave the stop alone. Just make sure your real win% can support that wider stop.
Last edited by trendwaves; September 9th, 2013 at 09:18 PM.
Reason: used the wrong commission in calculations...
The following user says Thank You to trendwaves for this post:
I've been listening to some FT 71 webinars and I realize how random I've been with my trading. Random entries, random exits. It seems that FT recommends keeping good stats, doing research and homework, discretionary entries and mechanical exits via a predetermined trading plan. I think following a structure like this will help me eliminate the stress of trade management.
Since I haven't used charts or indicators in the past I've always struggled with determining what my edge is. Everyone always says, you have to have an edge. I listened to FT say his edge is simply when he knows the probability of the trade going in the direction he wants is greater than the trade going against him. There's the edge I can shoot for. I can still be discretionary on my entries but after I take my trades based on probability, the trade management is defined.
The following user says Thank You to scalpingticks for this post:
I've always been a DOM only trader, considering if I need to research into market profile. I use the volume profile for the current date to determine quality trade location but I have never looked a multiday MP.
I have used both, but have found the volume profile more reliable. I guess it depends on what levels and associated strategy for using those levels. Obviously if your strategy is based on the MP VAL then you would need to use the 'official' VAL price. Composite profiles are pretty handy, you can create those using volume as easily as time.
It's interesting you mention FT71 because he focuses a lot of his instruction material on the concept of knowing the math underlying your trade management strategy. I tried in my earlier pot to bring a little bit of that sort of thinking into how your look at your performance results. One of my most important mantra's is: I want the the math working for me, not against me, it's part of my edge.
Great rules scalping. Since we chose not to have clearly set entry and exit criteria to make trading rules with as discretionary traders, definite money management rules are what I think we have to lean on to maintain a psychological consistency and subsequently profitable consistency.
fwiw - I find that my Daily loss rule should be no more than I expect to profit on a normal day ie I call it quits when I know it will take one average profitable day to cancel out the losing day. Just a psychological thing that helps me manage the losing days without losing my head. I also (try to happily) accept that I will have one of those losing days a week. That makes it psychologically easier to manage the rest of the week allowing for a down day. Then its a matter of scalping in such a way that the avg win, avg loss and probability of being right give a profitable expectancy that makes the effort worth it profitability wise.. stats that require ongoing adjustments after a sufficient sample set of scalps. I only feel the heat with comms when expectancy is < 0.5 with about 10 trades a day (happening a bit lately)
Looking forward to reading more of your progress. Crush it!
The leap into freedom is the exchanging of risk for reward. This can be done only by shifting from tension to ease, and that can be done only when one perceives the reward and not the risk. That you won't win all the time has nothing to do with it - that's life, that's the [stock] market. The trying itself is freeing. And being free has its own reward - Justin Mamis, The Nature of Risk
The following user says Thank You to grahamg for this post:
Ft71 has some fantastic stuff. I listen to his webinars frequently.
His last webinar he said the holy grail is consistency in your "rough" edge.
He attributed your edge to be as good as the 100 coin toss.
Basically if you have a 1:1 ratio where you never move your stop and you go all in (no runners) and all out. You are playing to give away commissions and slippage because you have a 50/50 chance at what ever trade you take.. Remember he said "All trades have a random outcome" ALL TRADES
In the back of my mind I heard him say that I need to have better than a 1:1 ratio.
That is not to say that I cannot start out with a 1:1 ratio and adjust my stop... As long as I do it based on structure and NOT fear.
If you always do what you have always done you will always get what you have always gotten.
Celebrate because you executed your edge. Not because you won.
The following user says Thank You to Patrick S for this post: