Diversifying directional trading through splitting entry points and using multiple stop types

Discussion in 'Strategy Development' started by MidwesternTrader, Jul 11, 2018.

  1. I've implemented some things in my CL and NQ daily directional trading over the past few months that had back tested well by increasing the average overall single unit return and also slightly lowering the average single unit draw down.

    The concepts are simple and nothing new. But if you haven't experimented with these concepts with your trading system, I would recommend playing around with them to see how they would impact your average, 1 lot trade. In essence, gaining trade result diversification through slight randomization.

    Concept #1 - Diversify Entry Points for the Same Trade
    • Add 20% to your stop loss amount
    • Then divide that new, higher stop loss amount in half
    • Then make two trades using that halved stop loss amount at different times instead of one trade.
    So if you had a system entering one NQ directional trade each morning at 10:00 with a -25 stop loss, this would change your approach to entering two NQ directional trades each morning with a -15 stop loss with one entry at 10:00 and one entry at 11:00. You can obviously experiment with different entry times.

    Concept #2 - Diversify Stop Types on the Same Trade

    Enter the same trade, but one trade using a hard stop loss and the other uses a trailing stop loss.

    So if you had a system entering one NQ directional trade with a hard stop loss at -15 points, make a second entry using a -15 trailing stop. The two different stop types often produce very different results, thus creating end result diversification.

    Concept #3 - Combine Concepts #1 and #2

    So this will essentially turn a single entry trading approach into a four entry trading approach. Continuing from examples above, the single directional NQ trade with a -25 stop loss becomes:
    • Entry 1: 10:00 AM entry with -15 stop loss
    • Entry 2: 10:00 AM entry with -15 trailing stop loss
    • Entry 3: 11:00 AM entry with -15 stop loss
    • Entry 4: 11:00 AM entry with -15 trailing stop loss
    What Happens During Implementation

    Obviously going from trading 1 contract to 4 contracts. The total risk per day jumps from -25 points (-$500) to -60 points (-$1200). Those are significant changes, I get it.

    But consider what happens to the average 1 lot trade result of your system. For a daily trading system, you will go from entering approximately 260 trades a year to 1,040 trades a year and highly diversifying your trade results based on your system's edge. If you have the capital to make these multiple entries using multiple stop types, it should smooth out the systems average 1 lot P & L curve, which is very desirable.
    userque, tommcginnis and wrbtrader like this.
  2. wrbtrader



    Thanks for the discussion about position size management in combo with stop loss management...very interesting.

    I've always approached position size management and stop loss management as independent of each other and have done very well as such but your approach causes the "think outside of the box" bulb to light up for me.

    MidwesternTrader and tommcginnis like this.
  3. They




    Seems like averaging down or averaging up into a trade setup that has a positive expectancy in terms of the day's directional bias would generally always produce better results. The bottom line with a time varied multi entrance method like this is simply trying to have more positions on when there is a strong unidirectional move.

    The only problems will be when whatever is giving the positive expectancy in regards to directional bias fails or there is increased volatility which will blow out the 15 pt stops causing you to miss the large moves which a system like this depends on for being profitable.

    Thanks for making me think.

    Go big or go home!!
    MidwesternTrader likes this.
  4. Yes, any approach that uses stops will be stopped out of some high volatility days that do end up moving big in the predicated direction of the trade. That is a cost of business for any system that uses stops, you trade protection against huge losses against the odds you may miss out on a big winner. Stops will mitigate 100% of huge losing days, but will not cause you to miss 100% of huge winning days. For those reasons I like the odds stops provide for long term viability of P & L curves.

    Making multiple entries over different time frames is a strategy to help get a piece of volatile days that move in your predicted direction. Hopefully with entry point randomization one of the entries will not get stopped out and you will catch a chunk of the move.

    Good trading to ya!
  5. They


    First part true, second part not necessarily true.

    If a stop is too small in a high/y volatile market the stops will be hit and then the market will just resume in the direction of the correct daily bias. The only case this would not be true is if you have somehow found a market that the volatility from the 10:00 entrance and the 11:00 entrance are statistically different.

    In other words for this system, correct daily bias and unidirectional days good, intraday volatility bad. :D

    I do think for systems based day traders being able to catch the few large unidirectional days that occur every month is important to a successful basket of systems. Entering at the right price and riding a trade to MOC that closes on LOD or HOD is certainly one of the best feelings in trading, even though it becomes yesterday's news upon tomorrow's open.

    Nice to see that you have refined this system from the four varied timeframe pyramiding entrance thread.

    Again, you make me think. I appreciate it.:thumbsup: