Risk: 2% of my total account or 2% stop loss?

[robster970]

+1

Just use logical places for your stop. Above/below swing high/lows, above or below important price action bars.

Basically pick a place on the chart where you can say... "I was wrong, time to get out"

 

[Shakone]

I'm all for experimentation, but presumably with almost 300k traders on this site there is a consensus for something a little more specific with respect to volatility?

Using technical support and resistance levels makes some sense as you're using statistically significant analysis based upon prior price action and reaction - there is empirical evidence to shake a stick at. While there is no guarantee price will ever conform to previous patterns and levels, neither does prior volatility presage future volatility.

Basing a stop on volatility could have me placing a wider stop than I need if recent volatility has been high or being taken out of the game with a small stop based on recent low volatility when it suddenly takes off.

I really appreciate the advice I'm being given and I'll roll up my sleeves and do whatever is necessary to do good research, but if volatility is a key factor in stop placement surely the mechanics of it can be more specifically stated.

For instance Shakone, what do you use?

You won't find a consensus, because what you do with stops depends on how you're trading.

And I don't think you'll like my answer of what I do. I use my stop as an insurance. It's not something that is used to take me out of normal trades. It is there to take me out if I lose connection or there is a sudden and strong move, not to decide exits for me. Don't give all responsibility of exiting losing trades to your stop.

I place it in - by my judgement - the closest spot to entry such that it will not get hit if I am correct on the trade, and even if I'm wrong will usually allow me to get out before it is hit. That spot is based on recent price action and MAE.

Many people will say put your stop at the place where the trade is invalidated. That's fair enough I suppose, but for me the trade doesn't need to get to a particular price to be invalidated. If the trade isn't working, I'll exit long before the stop might be hit.

If you're interested in tight stops, and not everyone is, it depends on your trading style, then read here

http://www.trade2win.com/boards/psy...-hard-stop-placement-great-contradiction.html

In particular the quoted posts of Socrates for example.

There are also some good contributions and different views here:

http://www.trade2win.com/boards/analysis/41820-price-stops.html

I'm definitely in the camp of the tightest stop possible.

 

[Purple Brain]

Thanks for your detailed response and for the links which I will check out directly after posting this.

While your take on stops and trade management are extremely interesting and give me useful further research impetus, I wondered specifically with regard to volatility how you measured it and utilised it in managing your trade/stop setting.

It was an issue raised by Trader333, but I don't think he's been back here since which is a shame as I thought there was something worth following up.

 

[Shakone]

Thanks for your detailed response and for the links which I will check out directly after posting this.

While your take on stops and trade management are extremely interesting and give me useful further research impetus, I wondered specifically with regard to volatility how you measured it and utilised it in managing your trade/stop setting.

It was an issue raised by Trader333, but I don't think he's been back here since which is a shame as I thought there was something worth following up.

It's not an explicit use of the volatility in the sense of measuring some numerical value of vol and applying it.

It only uses recent vol in the sense that recent vol is reflected in recent price, and if stop is based on recent price you've taken it into account.

 

[robster970]

+1

I use my stop as an insurance. It's not something that is used to take me out of normal trades. It is there to take me out if I lose connection or there is a sudden and strong move, not to decide exits for me. Don't give all responsibility of exiting losing trades to your stop.

I place it in - by my judgement - the closest spot to entry such that it will not get hit if I am correct on the trade, and even if I'm wrong will usually allow me to get out before it is hit. That spot is based on recent price action and MAE.

I think delegating trade exit to stops is a phase we all go through until you realise you are responsible for the mgmt of your trades in their entirety.

 

[Purple Brain]

http://www.trade2win.com/boards/psy...-hard-stop-placement-great-contradiction.html

In particular the quoted posts of Socrates for example.

There are also some good contributions and different views here:

http://www.trade2win.com/boards/analysis/41820-price-stops.html

I'm definitely in the camp of the tightest stop possible.

Now, that lot was definitely worth a read.

A number of things hit me. Many of the members in those two threads are no longer current or active posters. A shame I found this site after their prime posting periods. A lot of personal banter that was presumably based on some history, but even that was telling - that seasoned pros can take both [a] opposite views and get really quite aggressively passionate about it.

There appears to be little evidence of empirical basis for stop setting which is both bad in that you can't simply plug in the numbers and pull out the optimum stop size and good in that there is clearly a lot of room for subjective determination based on experience. This is probably less of a Catch-22 than it appears as those who don’t get the experience before they get the learnings don’t get to trade for too long and those that have, get to keep the winnings.

The only empirical stuff I saw on volatility (from Grey1) was way over my head and probably just basic starting level for institutional quants so I haven’t a hope in hell of utilising that.

As far as furthering my education, apart from those observations above, I have got a few things to concentrate on and research further.

Hypothesis-1: Trying to catch the start of a move might be impressive intellectually, but if I have to place a 50 pip stop to be comfortable getting in ‘early’, but only a 15 pip stop once the move is confirmed, and that stop is commensurate with position size, what’s the point of trying to 2nd guess the start of the move? I get fewer pips on the move getting into the move later but my position size is larger and I get fewer stopped out trades.

Hypothesis-2: My current method of using the most local confluence of support/resistance levels seems a sensible starting point. What volatility probably should be telling me is that the most local (nearest) confluence of SR levels is fine with low volatility action, but perhaps consider the next furthest away confluence for higher volatility action, allowing for the spikes to the nearest levels.

Hypothesis-3: A stop is not an Uncle point. It is a place where if things go horribly wrong you have a safety net for your risk capital. Where you exit a trade whether it be in profit or in loss is far more important. Don't let your trades run to their stops, but utilise data such as MAE and volatility and price action to determine when the action does not support your bias. That's going to be the toughest one to accomplish as I imagine I'll be cutting my losses short when I should be letting them run a little bit further. A combination of jounal entries and experience.

Thanks for the links Shakone.

 

[DitterPD]

Sorry but why would investing more mean a tighter stop loss? It should only change your position size. Your stop loss should always be them same regardless.

Work out where your stop should be before anything else!

Why not to have some flexibility with stop loss?

 

[ffsear]

That's what i'm saying! Doubling your position size and halving your stop is not being flexible. Its poor risk management.

You should work out your trade first in terms of how many pips/points it can go against your entry before it becomes apparent that you're wrong. Then apply your 2% risk to that number of pips.

 

[robster970]

Hypothesis-1: Trying to catch the start of a move might be impressive intellectually, but if I have to place a 50 pip stop to be comfortable getting in ‘early’, but only a 15 pip stop once the move is confirmed, and that stop is commensurate with position size, what’s the point of trying to 2nd guess the start of the move? I get fewer pips on the move getting into the move later but my position size is larger and I get fewer stopped out trades.

There is a compromise you make every time you take a trade in the location of your entry vs the level of confirmation you need to enter.

Let me give you a hypothetical example using ES for the same trade from two different traders.

Trader (1)
Price has bottomed in a move at 1645.00 and is currently trading 1646.25. I am confident that this is a reversal that will take price back to a notional target of 1652.25 and I have enough confirmation for me to take this trade. I get in at 1646.25 and place a stop at 1644.75. My risk is 1.5pts, my reward is 6pts. I have gone in using my experience and understanding of ES to go for a trade with a 1:4 r:r

Trader (2)
Price has bottomed in a move at 1645.00 and is currently trading 1646.25. I am not confident yet that this is a reversal that will take price back to a notional target of 1652.25. I will wait for a little more confirmation before I jump in. 3 minutes later, price is trading at 1647.25 and I can see more buyers coming into the market. I get in at 1647.25 and place a stop at 1644.75 (2.5pts). My risk is 2.5pts, my reward is 5pts. By going in a little later I feel comfortable about this trade as it has a 1:2 r:r

The point I am illustrating is that your desire to wait for more confirmation increases your stop size and reduces your profit opportunity.

 

[Purple Brain]

The point I am illustrating is that your desire to wait for more confirmation increases your stop size and reduces your profit opportunity.

While increasing your probability of a winning trade and improving your W:L?

 

[robster970]

While increasing your probability of a winning trade and improving your W:L?

It's not linear and it's down to experience and market understanding.

You don't get better at driving by watching motor racing do you....

e2a - the example for trader 1 is similar to a very good trade for me. I would be trying to hit a turn that low and if it went 1pt offside I would be out before it got to my stop. I would never wait 2.5pts from a low to get in for that kind of turn. However some people do. It's horses for courses. Ultimately when I go in, I am trying to get the most out of the trade if it is a runner or minimise my loss if it is a loser. Certainty doesn't exist in this game, at least not in the way many traders are looking for.

 

[cablemonster]

People talk about fixed % of their bank roll but overlook emotional capital. 2% is irrelevant if it breeches your comfort level. Unrealistic trade expectations will also mess with your head. Most novice traders keep swinging for the fences, which makes things a lot tougher.

 

[barjon]

........There is a compromise you make every time you take a trade in the location of your entry vs the level of confirmation you need to enter......

.

Yes and the same for exits. If in your hypothetical examples price starts turning back again near your notional target the more confirmation you want that it has reversed again the more you leave on the table when it has.

 

[robster970]

Yes and the same for exits. If in your hypothetical examples price starts turning back again near your notional target the more confirmation you want that it has reversed again the more you leave on the table when it has.

Indeed amigo, indeed...

 

[Purple Brain]

The point I am illustrating is that your desire to wait for more confirmation increases your stop size and reduces your profit opportunity.

Read this post again.

Isn't what you are saying simply that with experience you gain proficiency? This is obviously true of everything, but if this is what you're saying does that imply there is no shortcut to excellence other than experience? There are basic tools and empirical methods you and others have shown me one can employ to assist one's development on the way to gaining that experience, but nothing less than time and application will suffice?

 

[robster970]

Read this post again.

Isn't what you are saying simply that with experience you gain proficiency? This is obviously true of everything, but if this is what you're saying does that imply there is no shortcut to excellence other than experience? There are basic tools and empirical methods you and others have shown me one can employ to assist one's development on the way to gaining that experience, but nothing less than time and application will suffice?

Yes PB. It's about accumulating screen time and developing your own market understanding.

You will find certain clues by measuring your MAE and MFE on all your trades. You will see patterns in those numbers that demonstrate how market works in cycles and how the auction rotates around price. It's like a series of lightbulb moments that accompany a growing and deep felt desire to stop losing, but not in a desperate way. You become increasingly comfortable in yourself as you move through 'Conscious incompetence' to 'Conscious competence' and finally to 'Unconscious competence'.

Trade. Learn.

Rinse and repeat.

 

[barjon]

Read this post again.

Isn't what you are saying simply that with experience you gain proficiency? This is obviously true of everything, but if this is what you're saying does that imply there is no shortcut to excellence other than experience? There are basic tools and empirical methods you and others have shown me one can employ to assist one's development on the way to gaining that experience, but nothing less than time and application will suffice?

Similar to the your other thread you encompass the answer in your question when you say "assist one's development". The key word there is "assist".

One way or another we are all looking for momentum. Robster is at the leading edge and does it by watching the actual auction as it is taking place - you need a deep understanding of how the market and its participants operate to do that successfully. I do it many steps behind his via the less immediate price action. Both of us know we will be wrong a lot of the time and our common skill - to the degree that we have it - is to limit the damage when we are and to take adequate advantage when we are not.

 

[Purple Brain]

The more I read from you guys the more I know what it is I'm doing that's wrong. I'm making profits, but with a lot more risk exposure than is warranted. Cutting losses to me was sticking to my stop. My stops are placed at technical support / resistance levels and possibly quite sensible. Until pointed out to me that why wait for a bad trade to go all the way and take all my risk offered? Before when I pulled trades before they hit their stops I felt I was panicking and should stick to my analysis. But on the 5 occasions I've done that this morning, it was the right thing to do as the stops would have been taken in the event. I know one day is insufficient to draw any conclusion, but it certainly 'felt' right doing it this time.

Also typically my trades provide a profit of less than 1:1. I get enough right to make this a viable strategy, but when I see Robster talking, albeit hypothetically, about 1:4 I know I am cutting my profits way too early. I calculate targets, also based on technical support / resistance levels and these offer 1:3 to 1:6 targets, but typically I bale out before reaching them for a sub 1:1.

Even though I was constructing what were and probably are sensible stop levels and targets, by not pulling a bad trade earlier I was effectively letting my losses run and by getting out before even the first target, I was cutting my profits.

I haven't been keeping an eye on my intraday P&L, but I'm clearly down even without the long aud/nzd I've got at the moment which is down 20 pips.

But even if at the end of the day I am down, I'm going to feel just fine about that because it feels relaxed and correct to operate this way. Still constructing my trades as before but taking the money off the table if it hasn't gone my way and looks messy (TBD). Had I had any trades that had gone into profit I am confident I would have sat tight to at least the first target too.

I should also add I took FX Punt's advice on taking a smaller size on those trades for which I get a technical entry, but use a discretionary override if I feel the momentum has already played out. None of those trades paid me so far, but I didn't lose anywhere near to my initial stop. All round, I'm delighted with developments.

Thanks to all for your continued help.

 

[DitterPD]

People talk about fixed % of their bank roll but overlook emotional capital. 2% is irrelevant if it breeches your comfort level. Unrealistic trade expectations will also mess with your head. Most novice traders keep swinging for the fences, which makes things a lot tougher.

Shouldn't people deposit comfortable enough amount initially? And even so, how 2% can breech someone's comfort level? They understand that this won't be the end of the world, that they will have dozen of other trades and opportunities to predict the market.. if someone is not comfortable with "risking" 2% of bankroll then what are they doing in Forex?