Mr. Charts
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It IS the "truth" for 95%+, sadly.
Richard
Richard
TheBramble’s Trading 201
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barjon
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tony
What about having a separate thread for each of your upcoming thoughts for the day, maybe starting with this one?
It's about time we got some meaty discussion going amongst traders who want to explore various things and inexperienced who want to learn. The quick fix brigade can look elsewhere.
cheers
jon
ps: Ooops - should make it clear that this thread had just that intention and it's a shame not to have developed further.
Vrothdar
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I'm glad I've stumbled across this thread; it makes for good reading.
I've just started doing my own statistical work on historical data to develop a trading system. I'd definately say that statistical analysis of past performance is only going to be particularly meaningful for systems you stick to religiously; trading to your predefined rules no questions asked.
I'm currently working to develop a system which, in my opinion, lends itself very nicely to statistical analysis. It's dead simple. When a signal occurs, generate stoploss/target, enter the trade and do nothing else until either the stoploss or target are hit.
I'm a long way from reaching the sort of (historical) performance I'd like but the statistical work is interesting enough along to make the effort worthwhile.
I calculate win/loss, wins/(wins + losses + outcome unknown) and plug them in to a random equity curve generator, generate 1000 curves and judge a set of indicators based on what that looks like.
Once I've found a system that looks promising I'll check that my historical results on a weekly/monthly/yearly basis have a fairly tight standard deviation and that drawdowns and drawups (if that's a proper term, I'll use it until somebody corrects me anyway) are also within expectations. Once that has been achieved I'd be happy to move live with it.
I'd then have a spreadsheet setup that will let me easily test whether or not the result of the last week/month/year was within my expectations. If it wasn't I can entertain the idea that market conditions may have changed such that my system no longer works.
I'll have to assume that the result of any week/month/year fits a normal distribution and will use a geometric distribution to test whether or not a weekly/monthly/yearly drawdown or drawup is statistically likely.
The difficulty will be in putting complete faith in my signals and statistics when I'm making losses that on a PnL sheet look horrible but are statistically likely and are part of the long term success of the system.
:edit: It's probably worth noting that I'm not using charts. As far as I'm concerned, if I can't calculate it in excel using the open, high, low and close bars of the timeframe I'm looking at and then get excel to interpret it for me there's too much discretion involved.
I've just started doing my own statistical work on historical data to develop a trading system. I'd definately say that statistical analysis of past performance is only going to be particularly meaningful for systems you stick to religiously; trading to your predefined rules no questions asked.
I'm currently working to develop a system which, in my opinion, lends itself very nicely to statistical analysis. It's dead simple. When a signal occurs, generate stoploss/target, enter the trade and do nothing else until either the stoploss or target are hit.
I'm a long way from reaching the sort of (historical) performance I'd like but the statistical work is interesting enough along to make the effort worthwhile.
I calculate win/loss, wins/(wins + losses + outcome unknown) and plug them in to a random equity curve generator, generate 1000 curves and judge a set of indicators based on what that looks like.
Once I've found a system that looks promising I'll check that my historical results on a weekly/monthly/yearly basis have a fairly tight standard deviation and that drawdowns and drawups (if that's a proper term, I'll use it until somebody corrects me anyway) are also within expectations. Once that has been achieved I'd be happy to move live with it.
I'd then have a spreadsheet setup that will let me easily test whether or not the result of the last week/month/year was within my expectations. If it wasn't I can entertain the idea that market conditions may have changed such that my system no longer works.
I'll have to assume that the result of any week/month/year fits a normal distribution and will use a geometric distribution to test whether or not a weekly/monthly/yearly drawdown or drawup is statistically likely.
The difficulty will be in putting complete faith in my signals and statistics when I'm making losses that on a PnL sheet look horrible but are statistically likely and are part of the long term success of the system.
:edit: It's probably worth noting that I'm not using charts. As far as I'm concerned, if I can't calculate it in excel using the open, high, low and close bars of the timeframe I'm looking at and then get excel to interpret it for me there's too much discretion involved.
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TheBramble
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Jon, I'm OK keeping it all in this thread.
Vrothdar - you may just find that where you're going is exactly the opposite direction to where I am planning to take everyone on this thread. And for that reason, if no other, given your scientific and empirical style you'll probably want to carry on reading, just to find out, even if I'm wrong. Especially if I'm wrong!
Vrothdar - you may just find that where you're going is exactly the opposite direction to where I am planning to take everyone on this thread. And for that reason, if no other, given your scientific and empirical style you'll probably want to carry on reading, just to find out, even if I'm wrong. Especially if I'm wrong!
Vrothdar
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Correct me if I'm wrong, but you're directing the thread towards the idea of not using a scientific and empirical approach because most people don't understand the limitations of their data and/or calculations and as such end up with government style statistics!
If I'm right in that assumption then I'm probably in agreement with you. I've always believed that if you don't completely understand the limitations of your data and the statistical calculations you are using you should steer well clear of using statistics on that data.
Before anybody concludes otherwise I'd like to point out that I in no way consider myself an "expert" on statistical methods although I do believe that I have a good enough understanding to play devils advocate here.
If I'm right in that assumption then I'm probably in agreement with you. I've always believed that if you don't completely understand the limitations of your data and the statistical calculations you are using you should steer well clear of using statistics on that data.
Before anybody concludes otherwise I'd like to point out that I in no way consider myself an "expert" on statistical methods although I do believe that I have a good enough understanding to play devils advocate here.
TheBramble
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Absolutely correct. I was indicating that as you do seem to have a scientific/empirical approach yourself, you would be interested in my attempts - for precisely the reason you summarise above.
We are in complete agreement. Just didn't feel that way for a minute...LOL
We are in complete agreement. Just didn't feel that way for a minute...LOL
TheBramble
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Stops - Reposted with Author's Permission....
I’ve reposted this post I made some time back here from another ‘First Steps’ thread as it belongs in ‘201’ and specifically as it will be drawn upon at a later stage in this thread.
TIMEFRAMES
Why am I mentioning this up front in a post about STOPS?
The Daily chart and the 5 minute chart are not different instruments. ‘They’ do not ‘behave’ differently. They are simply different representations of the same thing – the history of the price. And they have a different audience. Or rather different audiences with different utilisations of any given timeframe. When you hear traders saying they trade this timeframe (TF from here on) or that TF, what they are referring to is the aggregate profile of the price as packaged at the level of granularity. Each bar/candle represents a granule. And that granule can be one year, one month, one week, one day and so on. ‘Normal’ intraday periods are 4 hour, 1 hour, 30 mins 15 mins 5 mins. Some real nutters go to 1 min or even tick charts, but they are easily sedated and cause no harm to the general population of merely insane traders.
Why I feel it’s important to make this seemingly obvious point up front is that a lot of bods get hung up debating which TF is ‘better’. You hear arguments such as ‘trends aren’t valid in sub-daily TFs’ and ‘the monthly sets the primary trend and pivot levels’. The thing is, there are enough traders operating at each of these TFs to provide you with a reasonably solid probabilistic base to accurately employ most technical analysis tools and to provide you with a better than 50% chance of getting a trade through to profit – regardless of your method or system. I’ll admit to personally believing that the fundamentals dictate the longer TFs while technicals lead the shorter TFs, but that’s just my view. Of course, the shorter TFs lead the longer TFs in that any major change in trend in the higher TFs has to start in the shorter. Has to start on the tick actually. Luckily, my view makes no difference to you and does not detract or enhance one iota the following. Which is why you can just relax and take it all in.
So when you hear of the daily being in an up trend and the 4 hourly being down and the 5 minute being flat – they’re not different instruments, just different representations of the historical behaviour of the price in that past when viewed at those levels of granularity.
They have significance only because others think they have significance.
If you want to test that hypothesis, try using your Fib retracement calculations on a 5 hour chart and try using the closing values of an 18 hour chart as key pivot points. You wont have much company up there…
So, what I’m saying is, don’t get hung up in which TF, just use them with an eye to how everyone else is probably using them, and with an even keener eye to how the big boys are expecting everyone else to be expecting everyone else to use them.
A lot of people think each lower TF operates within the context of the higher one. It’s an amusing abstraction and may represent reality for all I know, but regardless of your intellectual capability to recognise this for what it is or is not, why not play along with them and make some money too? They may be clowns, but there are a awful lot of them and they have money. Lots of it. And you want it.
Here’s the thing. In any one timeframe, they imagine there are specific price levels at which supply or demand will come into the market or will dry up and that this will impact price action, either slowing its descent or ascent. They may be right. Who cares? Whatever, they call these levels are called Support and Resistance. They are in actuality singular fractures in the space-time-price-phase continuum and only take on the distinct ’S’ or the ‘R’ context depending on the direction from which the price approaches them, but lets pretend they’re two different things for now . What YOU might want to consider doing is paying attention to what they think these levels are. In each TF. In each currency pair you’re thinking of playing with. (Works the same for stocks and indices and futures, but lets stick with currencies for now. Besides, the stocks, indices and futures traders have volume and open interest to assist them so they are in a better place anyway. Sod them for now).
Now, it would be just wonderful if you could keep in your head all these S/R levels in each TF. There are potentially many such levels in each TF. And there’s no reason you couldn’t. If you can’t manage that (wuss), you can note them physically on all your charts. Of course, an easier method is to just focus on one or maybe two pairs. Or alternatively, just note the current price level for the pairs you are interested in and note the nearest S/R levels in each TF. Here’s the deal. When the price gets close to any of these S/R levels in any one TF, you potentially have a pause, a strong breakthrough or a reversal of direction. It beats the boring all trending you get all the rest of the time. When this level on any given TF coincides with an S/R level in one or more other TFs for that same pair, the probability is even greater for a long pause or a reversal or a strong breakthrough. What’s this got to do with STOPS? Well, S/R levels are pretty good place to take stock and decide whether to carry on or reverse or hang around for a while. Up to you whether you want to 2nd guess it or wait for the move (with 3 options at a S/R level and only one of them profitable for you personally, it’s your call of course, but this is real basic probability…), but at least with S/R levels, you have the ability to focus on the price when it gets close and get on with other more interesting stuff when it isn’t. Nuff said.
And now, finally, to the meat of the post - STOPS.
STOPS
I make no distinction between a hard (preset) stop which is physically set at or very shortly after the trade is placed and executed automatically by your evil manipulative broker if the price reaches that preset level, and a soft (mental) stop which is manually activated by you at a level determined prior to or after placing the trade. (Mental as in it’s just an aide memoire and you will need to take specific physical action to exit the trade rather than mental as in it’s a bloody ridiculous place to put a stop). Both hard and soft stops are going to give you the same result. They get you out of a trade that hasn’t performed as well as your excellent analysis indicated it should. But the calculation of the stop and its placement were part of your excellent analysis and you should be proud for being smart enough to know where being sufficiently wrong enough was enough wrong for you to want out. You can also, more often than random chance would permit, be equally proud if not amazed that your stop was the precise level where the price would reverse and go in the originally intended direction. (Here’s a hint: Next time, don’t place the trade until the price is actually at the level where you would have put the stop had you taken the trade when you initially wanted to. This is typically 2 hours and 25 minutes earlier if you’re running 5 min charts).
One small point about changing stops after the trade is on. There’s a good reason the majority of successful traders who use stops would suggest it’s best not to change stops after the trade is on. And that reason is you’re less likely to be able to rationally reconfigure and repotimise a stop when you’re bleeding capital. And the times you typically want to consider resetting your stop is when it’s just about to get hit – i..e. you’re bleeding capital. And at that point you’re not normally thinking about reducing your risk, quite the opposite. Emotions come into play at those times which will prevent you more often than not from doing what’s really best for your trading capital long term.
It is of course quite feasible that you would want to reconsider your stop placement in order to reduce your risk (bring it in closer and tighter) if momentum or time issue indicate that is the correct form of action, but that will, or should be part of your trading plan before you enter the trade. Or if it wasn’t, after this trade, it will become so.
NO STOPS
This absolutely is the best form of stop. Without stops of any kind you never have to lose any money. The only prerequisite is that you get all your trades right. 100%. Forever. All of them. All the time. This is possible, quite seriously it is possible, but highly improbable. Unless you have made a deal with the Devil or have by other means guaranteed and certified you will always get all your trades right, this probably isn’t the best option. It will only take the one trade to show you quite effectively that do have a stop even if you thought you didn’t – when your account hits zero. Actually, a point a little way before that if your broker isn’t dead or asleep (and as they never sleep because they are “The Undead” your luck is pretty much out on that score).
Don’t think I am being merely probabilistic about traders being able to get all of their trades into profit. We exist. LOL. But unless you’ve never yet had a losing trade out of the 10,000+ or so you’ve taken, don’t ever imagine for a single moment you will ever be one of them.
WIDE STOPS
Aka ‘Giving the trade time to mature/room to breathe’.
The genuinely comforting thing about wide stops is that you can be awfully wrong about your trade direction and/or timing, and still feel vindicated that you had the foresight to recognise the possibility of being so incredibly wrong by allowing it an inordinate amount of slack before conceding defeat.
The downside to this is that you need, if you have any sense at all, to base your position size on your risk and you’re only going to be able to take one tenth the position with a 100 pip stop as you will with a 10 pip stop. More room to breathe. Indeed. Less reward too. And usually, more time (much more time) needed to make the target in relation the TF being traded.
I’ve tried all these methods and I have to say the gratification in not being stopped out 6 million pips away from your entry on the one or two occasions it worked out well doesn’t really make up for the paltry rewards when your trades do run to target – several centuries later. And you really can wait what seems like decades for them to come good.
There needs to be a realistic risk:reward in all your trades. No point risking 100 pips for a potential 20 pip reward. So the wider the stop the larger the target and the commensurately (normally) longer the lifespan of the trade. Even if you don’t think price is totally random, you probably have to agree that the longer you’re ‘live’ in the market – the greater is your exposure to risk. Not many consider time exposure as a positive thing. Unless they’re selling you option premium…
So you allow a 200 pip risk and you wait for your 1000 pip reward which takes 10 times as long and you get the same absolute profit.
My view is that stop type is largely if not totally an aspect of personal trader physio-psychology and not an academic or empirical issue. And is it most definitely a ‘physio’ thing as well as psychological. Taking loss is taking pain, physical hurt and mental disequilibrium. If you need room to be right even when you’re wrong, even if it takes your entire life – wide stops are the way to go.
TIGHT STOPS
Which do you think is easier for most traders (most traders HATE to take any losses), to take one 60 pip stop or to take ten 6 pip losses?
I personally like to be in profit as soon as I get into a trade. I like to play hit and run all the way up or down the trend (or the range). Dipping in and out.
If you decide EURUSD is going down and al the technicals are ‘right’ - and you go in and it goes against you by say 6 pips plus spread (just a for instance), there’s very little pain in killing that trade. Several times in fact. Until you get it right and it immediately goes into profit. Or until the conditions change and the short analysis no longer holds. And you move on.
You see, for me, there’s absolutely no difference between an initial stop and an ‘in play’ stop. I’m just in for the ride along some part of the trend. Many parts of the trend usually. Initiating a trade and it going 50 pips against me is just the same loss as being 150 pips up in a trade and letting it slip back to just 100 pips profit.
Getting in and staying in require constant positive movement into profitable territory. If it moves against you – get out. If and when it resume its ‘expected’ directional movement, get back in. The pips spread you pay each time is a very small insurance premium.
I know traders who will use a 2 or even 4XDaily ATR to stop themselves out. It works for them. It would make me cry. I’d rather make lots of commissions for my broker in lots of smaller trades on the way along the trend than risk a large pullback. But that’s just me. Fits my phsyio-psychological trading needs perfectly.
The downside, if it is really a downside, is that you’re making lots of smaller trades and relatively lots of money for your broker. But also for you though.
The upside is that you’re ‘in’ the market for shorter periods of time, so time exposure is smaller, and most of the time you’re in the market, your trades are in positive territory.
Another upside is that your losses, though frequent, though possibly at times even more numerous than your profitable trades, are small and easy to handle and total far les than you total profits.
You also get to manage your trades far more proactively which means more screen time. Upside or downside? What else were you planning to do today?
SCALING OUT STOPS
This isn’t a bad option. Somewhere between wide stops and tight stops. It says ‘I know I’m wrong, but I might not be totally wrong’. This will decrease your exposure, lock in some loss, but not all. You ain’t dead yet.
You set scale out levels at a number of intervals, say 3 or 4. When the price goes against you to stop level 1, you scale out one quarter your position. Stop level 2, another quarter, etc. Or you could split it over just 3 or 2 levels.
This has some merit and gives you more control over your losses and takes some of the heat out of being emotionally totally wrong. You can always put that quarter position back on when it comes back, if it ever does come back.
It also means you are hitting relatively (for you) small losses on the way at each level and these are much easier to take emotionally and financially
The downside is that you have far more work in calculating your trade position and bail out levels and you need more effort and time to manage your trade. It’s a trade off, but one that many find worthwhile.
REVERSE ORDER STOPS
This is similar spiritually to the NO STOPS style and absolutely the same in financial terms as a normal STOP. You simply take an opposite position to you current trade. You lock in your loss. You’ll need two accounts (some brokers offer sub-accounts which is the same thing) as you obviously can’t take an opposite trade in the same account as the original trade or that will simply cancel it out – a normal stop/close.
These seem attractive on the face of it. You get to keep your original trade (gone wrong – however temporarily) and you also befit from the pair’s current wilful disobedience in going in the ‘wrong’ direction by profiting on the 2nd trade taken in that direction. The net result is of course the same as if you had taken the loss. The only difference is that you have funds tied up for the duration and you are faced with how to unwind two positions now rather than one.
You can wait until the ‘temporary glitch’ burns itself out and take your profit on the second (reverse order) trade and then wait for your original trade to get into profit having already booked your 2nd leg profits. Of course, there’s nothing to stop the price reversing again. At which pint you can always put on another reverse position trade. You can whipsaw around all year long taking contra trades and making small profits and breakevens and lots of pips commission for your broker. Ad Infinitum. But that’s the thing, there is no infinity with your trading capital. You can play hit and run all the way down (if your original position was Long) and bank profits on your reverse position shorts all the way, but all the time, your exposure on your original Long is eating massively into your margin. And there’s no guarantee it’ll ever come right. You’re just putting off what you should have addressed way back. And al those profits you banked on the contra trade(s) on the way, guess what – they wont be taken into consideration when you see the size of your loss on your main trade. Been there. So you don’t need to. Unless you like pain. In which case, I fully recommend it.
I’ve outlined a few approached you can take to setting (and not setting) stops. While I’ve been less than covert in explaining my current preferred approach to stop setting you shouldn’t take this as an endorsement for any specific style. My entire thrust has been to suggest you need to explore what best fits your personal style, approach. Method and system.
I’ve reposted this post I made some time back here from another ‘First Steps’ thread as it belongs in ‘201’ and specifically as it will be drawn upon at a later stage in this thread.
TIMEFRAMES
Why am I mentioning this up front in a post about STOPS?
The Daily chart and the 5 minute chart are not different instruments. ‘They’ do not ‘behave’ differently. They are simply different representations of the same thing – the history of the price. And they have a different audience. Or rather different audiences with different utilisations of any given timeframe. When you hear traders saying they trade this timeframe (TF from here on) or that TF, what they are referring to is the aggregate profile of the price as packaged at the level of granularity. Each bar/candle represents a granule. And that granule can be one year, one month, one week, one day and so on. ‘Normal’ intraday periods are 4 hour, 1 hour, 30 mins 15 mins 5 mins. Some real nutters go to 1 min or even tick charts, but they are easily sedated and cause no harm to the general population of merely insane traders.
Why I feel it’s important to make this seemingly obvious point up front is that a lot of bods get hung up debating which TF is ‘better’. You hear arguments such as ‘trends aren’t valid in sub-daily TFs’ and ‘the monthly sets the primary trend and pivot levels’. The thing is, there are enough traders operating at each of these TFs to provide you with a reasonably solid probabilistic base to accurately employ most technical analysis tools and to provide you with a better than 50% chance of getting a trade through to profit – regardless of your method or system. I’ll admit to personally believing that the fundamentals dictate the longer TFs while technicals lead the shorter TFs, but that’s just my view. Of course, the shorter TFs lead the longer TFs in that any major change in trend in the higher TFs has to start in the shorter. Has to start on the tick actually. Luckily, my view makes no difference to you and does not detract or enhance one iota the following. Which is why you can just relax and take it all in.
So when you hear of the daily being in an up trend and the 4 hourly being down and the 5 minute being flat – they’re not different instruments, just different representations of the historical behaviour of the price in that past when viewed at those levels of granularity.
They have significance only because others think they have significance.
If you want to test that hypothesis, try using your Fib retracement calculations on a 5 hour chart and try using the closing values of an 18 hour chart as key pivot points. You wont have much company up there…
So, what I’m saying is, don’t get hung up in which TF, just use them with an eye to how everyone else is probably using them, and with an even keener eye to how the big boys are expecting everyone else to be expecting everyone else to use them.
A lot of people think each lower TF operates within the context of the higher one. It’s an amusing abstraction and may represent reality for all I know, but regardless of your intellectual capability to recognise this for what it is or is not, why not play along with them and make some money too? They may be clowns, but there are a awful lot of them and they have money. Lots of it. And you want it.
Here’s the thing. In any one timeframe, they imagine there are specific price levels at which supply or demand will come into the market or will dry up and that this will impact price action, either slowing its descent or ascent. They may be right. Who cares? Whatever, they call these levels are called Support and Resistance. They are in actuality singular fractures in the space-time-price-phase continuum and only take on the distinct ’S’ or the ‘R’ context depending on the direction from which the price approaches them, but lets pretend they’re two different things for now . What YOU might want to consider doing is paying attention to what they think these levels are. In each TF. In each currency pair you’re thinking of playing with. (Works the same for stocks and indices and futures, but lets stick with currencies for now. Besides, the stocks, indices and futures traders have volume and open interest to assist them so they are in a better place anyway. Sod them for now).
Now, it would be just wonderful if you could keep in your head all these S/R levels in each TF. There are potentially many such levels in each TF. And there’s no reason you couldn’t. If you can’t manage that (wuss), you can note them physically on all your charts. Of course, an easier method is to just focus on one or maybe two pairs. Or alternatively, just note the current price level for the pairs you are interested in and note the nearest S/R levels in each TF. Here’s the deal. When the price gets close to any of these S/R levels in any one TF, you potentially have a pause, a strong breakthrough or a reversal of direction. It beats the boring all trending you get all the rest of the time. When this level on any given TF coincides with an S/R level in one or more other TFs for that same pair, the probability is even greater for a long pause or a reversal or a strong breakthrough. What’s this got to do with STOPS? Well, S/R levels are pretty good place to take stock and decide whether to carry on or reverse or hang around for a while. Up to you whether you want to 2nd guess it or wait for the move (with 3 options at a S/R level and only one of them profitable for you personally, it’s your call of course, but this is real basic probability…), but at least with S/R levels, you have the ability to focus on the price when it gets close and get on with other more interesting stuff when it isn’t. Nuff said.
And now, finally, to the meat of the post - STOPS.
STOPS
I make no distinction between a hard (preset) stop which is physically set at or very shortly after the trade is placed and executed automatically by your evil manipulative broker if the price reaches that preset level, and a soft (mental) stop which is manually activated by you at a level determined prior to or after placing the trade. (Mental as in it’s just an aide memoire and you will need to take specific physical action to exit the trade rather than mental as in it’s a bloody ridiculous place to put a stop). Both hard and soft stops are going to give you the same result. They get you out of a trade that hasn’t performed as well as your excellent analysis indicated it should. But the calculation of the stop and its placement were part of your excellent analysis and you should be proud for being smart enough to know where being sufficiently wrong enough was enough wrong for you to want out. You can also, more often than random chance would permit, be equally proud if not amazed that your stop was the precise level where the price would reverse and go in the originally intended direction. (Here’s a hint: Next time, don’t place the trade until the price is actually at the level where you would have put the stop had you taken the trade when you initially wanted to. This is typically 2 hours and 25 minutes earlier if you’re running 5 min charts).
One small point about changing stops after the trade is on. There’s a good reason the majority of successful traders who use stops would suggest it’s best not to change stops after the trade is on. And that reason is you’re less likely to be able to rationally reconfigure and repotimise a stop when you’re bleeding capital. And the times you typically want to consider resetting your stop is when it’s just about to get hit – i..e. you’re bleeding capital. And at that point you’re not normally thinking about reducing your risk, quite the opposite. Emotions come into play at those times which will prevent you more often than not from doing what’s really best for your trading capital long term.
It is of course quite feasible that you would want to reconsider your stop placement in order to reduce your risk (bring it in closer and tighter) if momentum or time issue indicate that is the correct form of action, but that will, or should be part of your trading plan before you enter the trade. Or if it wasn’t, after this trade, it will become so.
NO STOPS
This absolutely is the best form of stop. Without stops of any kind you never have to lose any money. The only prerequisite is that you get all your trades right. 100%. Forever. All of them. All the time. This is possible, quite seriously it is possible, but highly improbable. Unless you have made a deal with the Devil or have by other means guaranteed and certified you will always get all your trades right, this probably isn’t the best option. It will only take the one trade to show you quite effectively that do have a stop even if you thought you didn’t – when your account hits zero. Actually, a point a little way before that if your broker isn’t dead or asleep (and as they never sleep because they are “The Undead” your luck is pretty much out on that score).
Don’t think I am being merely probabilistic about traders being able to get all of their trades into profit. We exist. LOL. But unless you’ve never yet had a losing trade out of the 10,000+ or so you’ve taken, don’t ever imagine for a single moment you will ever be one of them.
WIDE STOPS
Aka ‘Giving the trade time to mature/room to breathe’.
The genuinely comforting thing about wide stops is that you can be awfully wrong about your trade direction and/or timing, and still feel vindicated that you had the foresight to recognise the possibility of being so incredibly wrong by allowing it an inordinate amount of slack before conceding defeat.
The downside to this is that you need, if you have any sense at all, to base your position size on your risk and you’re only going to be able to take one tenth the position with a 100 pip stop as you will with a 10 pip stop. More room to breathe. Indeed. Less reward too. And usually, more time (much more time) needed to make the target in relation the TF being traded.
I’ve tried all these methods and I have to say the gratification in not being stopped out 6 million pips away from your entry on the one or two occasions it worked out well doesn’t really make up for the paltry rewards when your trades do run to target – several centuries later. And you really can wait what seems like decades for them to come good.
There needs to be a realistic risk:reward in all your trades. No point risking 100 pips for a potential 20 pip reward. So the wider the stop the larger the target and the commensurately (normally) longer the lifespan of the trade. Even if you don’t think price is totally random, you probably have to agree that the longer you’re ‘live’ in the market – the greater is your exposure to risk. Not many consider time exposure as a positive thing. Unless they’re selling you option premium…
So you allow a 200 pip risk and you wait for your 1000 pip reward which takes 10 times as long and you get the same absolute profit.
My view is that stop type is largely if not totally an aspect of personal trader physio-psychology and not an academic or empirical issue. And is it most definitely a ‘physio’ thing as well as psychological. Taking loss is taking pain, physical hurt and mental disequilibrium. If you need room to be right even when you’re wrong, even if it takes your entire life – wide stops are the way to go.
TIGHT STOPS
Which do you think is easier for most traders (most traders HATE to take any losses), to take one 60 pip stop or to take ten 6 pip losses?
I personally like to be in profit as soon as I get into a trade. I like to play hit and run all the way up or down the trend (or the range). Dipping in and out.
If you decide EURUSD is going down and al the technicals are ‘right’ - and you go in and it goes against you by say 6 pips plus spread (just a for instance), there’s very little pain in killing that trade. Several times in fact. Until you get it right and it immediately goes into profit. Or until the conditions change and the short analysis no longer holds. And you move on.
You see, for me, there’s absolutely no difference between an initial stop and an ‘in play’ stop. I’m just in for the ride along some part of the trend. Many parts of the trend usually. Initiating a trade and it going 50 pips against me is just the same loss as being 150 pips up in a trade and letting it slip back to just 100 pips profit.
Getting in and staying in require constant positive movement into profitable territory. If it moves against you – get out. If and when it resume its ‘expected’ directional movement, get back in. The pips spread you pay each time is a very small insurance premium.
I know traders who will use a 2 or even 4XDaily ATR to stop themselves out. It works for them. It would make me cry. I’d rather make lots of commissions for my broker in lots of smaller trades on the way along the trend than risk a large pullback. But that’s just me. Fits my phsyio-psychological trading needs perfectly.
The downside, if it is really a downside, is that you’re making lots of smaller trades and relatively lots of money for your broker. But also for you though.
The upside is that you’re ‘in’ the market for shorter periods of time, so time exposure is smaller, and most of the time you’re in the market, your trades are in positive territory.
Another upside is that your losses, though frequent, though possibly at times even more numerous than your profitable trades, are small and easy to handle and total far les than you total profits.
You also get to manage your trades far more proactively which means more screen time. Upside or downside? What else were you planning to do today?
SCALING OUT STOPS
This isn’t a bad option. Somewhere between wide stops and tight stops. It says ‘I know I’m wrong, but I might not be totally wrong’. This will decrease your exposure, lock in some loss, but not all. You ain’t dead yet.
You set scale out levels at a number of intervals, say 3 or 4. When the price goes against you to stop level 1, you scale out one quarter your position. Stop level 2, another quarter, etc. Or you could split it over just 3 or 2 levels.
This has some merit and gives you more control over your losses and takes some of the heat out of being emotionally totally wrong. You can always put that quarter position back on when it comes back, if it ever does come back.
It also means you are hitting relatively (for you) small losses on the way at each level and these are much easier to take emotionally and financially
The downside is that you have far more work in calculating your trade position and bail out levels and you need more effort and time to manage your trade. It’s a trade off, but one that many find worthwhile.
REVERSE ORDER STOPS
This is similar spiritually to the NO STOPS style and absolutely the same in financial terms as a normal STOP. You simply take an opposite position to you current trade. You lock in your loss. You’ll need two accounts (some brokers offer sub-accounts which is the same thing) as you obviously can’t take an opposite trade in the same account as the original trade or that will simply cancel it out – a normal stop/close.
These seem attractive on the face of it. You get to keep your original trade (gone wrong – however temporarily) and you also befit from the pair’s current wilful disobedience in going in the ‘wrong’ direction by profiting on the 2nd trade taken in that direction. The net result is of course the same as if you had taken the loss. The only difference is that you have funds tied up for the duration and you are faced with how to unwind two positions now rather than one.
You can wait until the ‘temporary glitch’ burns itself out and take your profit on the second (reverse order) trade and then wait for your original trade to get into profit having already booked your 2nd leg profits. Of course, there’s nothing to stop the price reversing again. At which pint you can always put on another reverse position trade. You can whipsaw around all year long taking contra trades and making small profits and breakevens and lots of pips commission for your broker. Ad Infinitum. But that’s the thing, there is no infinity with your trading capital. You can play hit and run all the way down (if your original position was Long) and bank profits on your reverse position shorts all the way, but all the time, your exposure on your original Long is eating massively into your margin. And there’s no guarantee it’ll ever come right. You’re just putting off what you should have addressed way back. And al those profits you banked on the contra trade(s) on the way, guess what – they wont be taken into consideration when you see the size of your loss on your main trade. Been there. So you don’t need to. Unless you like pain. In which case, I fully recommend it.
I’ve outlined a few approached you can take to setting (and not setting) stops. While I’ve been less than covert in explaining my current preferred approach to stop setting you shouldn’t take this as an endorsement for any specific style. My entire thrust has been to suggest you need to explore what best fits your personal style, approach. Method and system.
TheBramble
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Losers & Winners - Reaction/Anticipation/Creation
Losers react, winners anticipate and wait for early confirmation, but the people who make the big money create situations based on what they know about the way the herd behave.
Losers react, winners anticipate and wait for early confirmation, but the people who make the big money create situations based on what they know about the way the herd behave.
TheBramble
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News
Forget the news, remember the chart. You're not smart enough to know how news will affect price. The chart already knows the news is coming.
Forget the news, remember the chart. You're not smart enough to know how news will affect price. The chart already knows the news is coming.
TheBramble
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Pullbacks and Retracements
Buy the first pullback from a new high. Sell the first pullback from a new low. There's always a crowd that missed the first boat.
Buy the first pullback from a new high. Sell the first pullback from a new low. There's always a crowd that missed the first boat.
TheBramble
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Support & Resistance
Buy at support, sell at resistance. Everyone sees the same thing and they're all just waiting to jump in the pool.
Buy at support, sell at resistance. Everyone sees the same thing and they're all just waiting to jump in the pool.
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Gaps
Exhaustion gaps get filled. Breakaway and continuation gaps don't. The old traders' wisdom is a lie. Trade in the direction of gap support whenever you can.
Exhaustion gaps get filled. Breakaway and continuation gaps don't. The old traders' wisdom is a lie. Trade in the direction of gap support whenever you can.
TheBramble
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Instinct
If you have to look, it isn't there. Forget your technical analyses and empirical studies and learn to simply trust your instincts.
If you have to look, it isn't there. Forget your technical analyses and empirical studies and learn to simply trust your instincts.
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Last Hour of Trading
The trend is your friend in the last hour. As volume cranks up at 3:00pm don't expect anyone to change the channel.
The trend is your friend in the last hour. As volume cranks up at 3:00pm don't expect anyone to change the channel.
TheBramble
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Trading the Open
Avoid the open. They see you coming.
Avoid the open. They see you coming.
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Enough one-liners for today. Let's see if there's anything to be discussed.
Everyone happy with those statements I've made above?
Everyone happy with those statements I've made above?
Mr. Charts
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Generally some truth, but the specifics are occasionally different eg pullbacks and trading the open.
Will elaborate when time permits; US opens in 5 mins so I've got to go and walk the walk now.
Good thread, Tony.
Richard
Will elaborate when time permits; US opens in 5 mins so I've got to go and walk the walk now.
Good thread, Tony.
Richard
simcom
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Thanks for those. There are also some good short bitesize chunks in trader_dante's thread (Lessons from successful traders) in case anybody hasn't already seen it.
As a matter of interest, you agreed with Vrothdar when he mentioned that you're taking the thread towards a direction of not promoting the use of a scientific/empirical approach. Just because this is the direction of the thread, is this something you subscribe to in your own analysis, or rather intended to prevent new traders getting too hung-up on the stats at the expense of everything else?
Vrothdar
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Agree entirely there. News isn't quantifiable so don't try to quantify it.
TheBramble said:
After a skim through that big old post I thought I'd make a quick point on the part I've quoted. Personally, I'd avoid referring to specific time frames as, in my opinion, it's more likely to lead to confusion. Using a daily ATR to define stops calculated when you're trading on a 5minute chart (for example) would be suicide.
I tend to prefer using referring simply to bars as the meaning behind a statement is less likely to get lost in translation.
Vrothdar
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I think he was agreeing with the idea of promoting people to use only scientific/empirical analysis when they understand where it came from, what it means, it's limitations etc. People will find different levels of such analysis useful (or not) depending on their level of understanding.
Without that understanding scientific/empirical analysis is meaningless to whoever is interpreting it.
If TheBramble contradicts me here I've no idea what I agreed to earlier in the thread. I'll have to watch my back!!
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