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I have searched for this and did not come up with a solid answer... I only trade ES Mini... I seem to struggle with my stops. I like trailing stops cause it is robotic, set it and let the trade take me out. But how wide? it seems to me lately the number is 2 points/8 ticks... one thing this forces me to do is keep losses manageable, but let my winners run... I have had a tendency to take profits too early...
anyone who trades the ES have input? what do you do for Stop loss and exit price
Can you help answer these questions from other members on NexusFi?
To use an ES stop of only 2p, you are either a) trying to scalp the market or you b) have an absolutely
precise anticipation of each move the market will make. Chances of b) are low for most of us.
Find out what the average move of the ES for your trade periods is (mean, standard deviation etc.).
By doing that, you will find a distribution of noise - an area where your stops regularly will be triggered
"without any reason" just because markets tend to fluctuate. Since stops within the noise area aren't
a good idea: Pass these trades or close the position because normal probabilities show that the market
will close it for you anyway most of the time.
That said, choose meaningful stops outside of the noise. "Meaningful" means: stops that are founded
in market/price action, not in anything that you want to impose on the market externally - as the market
gives a s**t about what we want it to do
In reality it can lose a lot of money, because of all the times that the price initially moves in your favour (and the trailing stop with it), then retraces just enough to take out the trailing stop before continuing in "your" direction and reaching your target.
For myself, before using trailing stops I'd want to see irrefutable evidence, proven over a few hundred trades with/without, that the system/method actually makes more overall profit with them than without them. I've looked and I still do, but I've never found that before. Perhaps there'll be a first time but I'm not holding my breath waiting for it.
I want to exit trades when the price developments since my entry have shown that the entry was invalid, i.e. that I no longer want to be in the trade. I can't do that reliably enough, myself, with trailing stops.
Trailing stops is lazy... You'll catch a couple of big runners once in a while that you can tell your friends about but they won't pay for all the ticks you'll lose getting stopped out from a trail, just use targets.
If you give up 2 points every trade thanks to your trail, it stands to reason after 10 trades you are already behind by 20 points versus someone who used a target instead. You would have to catch an additional 20 points from one or more big trends within those 10 trades to have a better outcome.
Trails only work in really trendy markets, ES is not one of them.
A friend is an algo/HFT trader, one whom I have been learning under. He says that his methods for stops are simply minor/major s/r levels, or something to that effect.
Exits are a different strategy though. He claims he has massive, elaborate (yet fast) mm algos that determine exits and scaling. Listening to him is like listening to @Big Mike, "always scale, in and out; always."
These algos are dynamic, without fixed parameters, that are based on many metrics. They are constantly changing, and context that made a trade valid 10 minutes ago may not be valid right this second.
Now understand that your brain is like this. So the trade will be sustained as long as the parameters are all valid, which depend on one another to maintain validity. If one goes out of skew, and you see a trade setup, do you take it? What would the algo do?
Here's a scenario - Imaging you're outside, playing football in the street with your friends. Several things must be aligned before you throw the ball: there are no cars coming, you actually have someone to catch the ball, the sun is shining, there is little wind, the weather is clear, it's not snowing, it's not a dust storm, there are no mosquitoes out, etc.
If all the conditions are right, you definitely go out and play. Maybe you can play with a few adverse conditions, but they limit your fun. If a car starts coming, you definitely get out of the way (FOMC anyone?). If it starts hailing golf balls, you get out of the way. Start getting picked off by bugs, you go back inside and unload some cortisone cream.
Being flexible in your trading doesn't mean fudging your rules, it's knowing that the rules are never constant, so you merely flow with them.
Short version is beautifully simple, as Mike drives into my head every time I read his wisdom; exit the trade when it's no longer valid.
The problem is your brain is fundamentally flawed when it comes to dealing with stochastic events like this. The best example is from Thinking, Fast and Slow by Kahneman:
3 sets of the sex of six babies born in sequence at a hospital:
B B B B B B
G G G G G G
B G G B G B
What one is more likely?
If you take this to 8 ticks, it doesn't matter at all about context because context in that scenario is just your brain creating narrative that doesn't exist in the same way it despises that all 3 of those events above are equally likely.
I get that, read the book, etc...but what's your point in regards to my point? I was implying that your brain is taking multiple streams of data, and makes a decision of validity based on all of those.
I'm actually a big fan of algo trading because of our cognitive faults in something that requires comfort with randomness.
Review Wyckoffs' work on price movement. The answer to your question will become self apparent when you note that wyckoff traded using point and figure (traditional type, not ATR) charts taking into account inflections of $1, $3, and $10. Lateral areas of multiple x's reveal balance points, vertical manage your risk.
And stay away from "mean reversion"...very few can identify any valid mean in the moment.
