I have been recently getting stopped out a lot because of the increased volatility in the ES just to see it reverse and go my intended direction soon after hitting my stop. How do you guys modify your stops/targets based on the volatility of the instrument you trade ?
Original stop. Basically, if you were using a 2 point stop say 2 months ago is it the same stop these days based on the increased volatility.
My original stop is based on a technical level. Volatility dosen't matter. If I say I'm selling off of x then a price above x gets me out. Trailing stops are more problematic. If you could discuss specifics I'm all ears. I would emphasize though before hand that you not confuse randomness with a poor stop location. Did the market go your original direction after you were stopped out because you really didn't give it enough room per your methodology or was it just luck one way or the other? In other words here's a common example. The markets trading 1265 and I think "gee I shoulda sold off my 1269 resistance. So I sell 66's with a 70 stop, the market trades up to 71.75 and then tanks without me. Was my stop in a "bad" place or was my play wrong.?
"I would emphasize though before hand that you not confuse randomness with a poor stop location. Did the market go your original direction after you were stopped out because you really didn't give it enough room per your methodology or was it just luck one way or the other?" That's a good point. My recent trades would all have worked and for more profits than I had intended if I would have used a larger stop. It seems like the volatility is bringing better opportunities but only if I adjust my system's parameters (stop/target). I'm just trying to find a smart way of doing this. Obviously, I will also have to reduce my position size if I take more risk.
You're answering your own question! If you increase your risk 2x then cut your size down. If the wider stop increases your expectancy then you can turn your size back up a notch.
The easy way is to just cut my position size in half, double my stop and be done with it, but I was hoping for a more mathematical approach to the problem. Maybe with ATR, volume, etc. Just looking for some ideas on when and how to modify risk/target based on volatility. Any and all ideas welcomed ?
"If you increase your risk 2x then cut your size down. If the wider stop increases your expectancy then you can turn your size back up a notch." Thanks, I just saw this part of your answer Pa(b)st Prime. Maybe you added it after If you are a discretionary trader then I guess it's as simple as that. For a system trader like me, I have to find a way of : 1) Finding out if the current market is more volatile ? Sometimes the past days have been volatile but the current day is not. 2) Adjust stop/target Maybe there is no way of adjusting my system automatically so then my only option would be to make discretionary modifications to some of my sytem's parameters from time to time. But it would be nice if it could be all done automatically by the system.
It's not market dependant but I$land dependant. What's your normal r/r? What's your expected r/r if you widen your stop? IOW's are you saying you're normally 2-6 with a 45% hit rate but now down to a 25% on the increased chop? If you go to 4-6 how much does your hit rate increase? Volatility is variable ya know. Depends on timeframes ect. and the market can slow down on a dime.
Ah, there's the rub. You still have discretionary inputs to an otherwise automatic system. I've found it's best to find one set of parameters and stick with them day in, day out. The trick is finding the right ones that give you a <i>consistent edge over a long period of time</i>. Attempting to tune (my system at least) on a day by day basis kills its performance. BTW, if you could reliably predict volatility, you could just forget the ES and make money off of VIX options.