"You sound as though you are trading scared. You have thought of every conceivably bad thing that can happen to you" it's actually the exact opposite. i am trading confidently. i have a very detailed trading manual, i fastiduously document all trades (about 20 factors per trade), and while i don't LIKE getting stopped out. i'm zen about it. iow, i can enter trades with confidence because i know my setups work (some over 70% of the time), and i know exactly how much i am risking (with a tick ot two of slippage wiggle room) in my trades. that's a confident, empowering and positive expectancy way to trade. with your mental stops, etc. you never have any idea how much you are risking per trade. it's all subjective. also, when a trade moves past your mental stop, unless you are a robot, you will necessarily NOT be in the calm frame of mind to make the BEST decision possible. i make my entry and stop decisions PRIOR to entering the trade. i am not invested, psychologically or economically in my being right or wrong in my analysis. when you adjust stops out/use mental stops when in a trade you ARE. you are way more subject to cognitive dissonance and erosion of judgment. because you are human. so, aside from the mathematical concerns you have psychological concerns. trading my way is confidence inspiring. i know my positive expectancy, and the statistics on entering trade X with stop Y. i have literally HUNDREDs of trials on these setups. often the best trades are the hardest to enter. since i KNOW my setups, i can enter when the hoi polloi are panicking, because i know my risk, and my statistical probability of reward. trading without stops (and mental stops are the functional equivalent) is truly trading WITH fear. fear that your stop will be hit, so you make it a mental stop and then make a subjective decision when price action hits that level. you add a contract, then see it go another X points against you and you WILL be less rational than you were initially. the WORST thing that can happen is the trade turns out profitable because that will reinforce behavior that at a minimum is suboptimal and at a maximum is disastrous. there is a huge difference between expecting the worst (i don't) and being prepared for its eventuality. the latter is prudent. the former is worthless i've spoken to brokers, losing traders, and winning traders. i was trained by a very savvy trader. trading is very much about psychology, and what you are espousing is VERY understandable considering human psychology, and it's exactly WHY the markets ARE so tradeable. it's irrational, negative expectancy, and contains open ended risk. it cries out for fat tail ass-whuppin!
R/R (for me) is defined by the setup, and MY historic probability of such setup. To an extent this differs from a scalp, which, for me, is ALWAYS based 100% on price action. A scalp really doesn't have R/R (for me). It's about reading the PA correctly, or not. That said, if I enter with expectation of a scalp only with NO expectation of a "bigger" setup in sight, the scalp is at worst a 1:1 R/R for me. In this market, a scalp can be 30-50 YM points. In MY practice, success of scalp trades is determined in seconds, minutes at worst, and a .35:1 R/R is norm, whether hard stop or mental stop. For me, this differs from using PA in combination with other TA. When playing the "bigger" setups where PA is usually only a "leading indicator", I find scaling in useful. Once fully deployed, I will use a stop based on the entire position. In this market, the bigger setups are YM 50-200+ pts. Picking exact tops and/or bottom is not what I look for. If I am expecting say a 100pt or so move, once my full position is on I will place a stop at a level which I believe is outside the TA levels in order to ride the move. Again at worst this would be 1:1 in R/R terms. No matter if scalp or intraday swing, my initial goal is to have a move large enough to allow me to set a stop on at breakeven-net or just exit the trade (loss or profit, it doesn't really matter as long as Im trading what IS happening, not what I want to happen), ready for the next one. As for the catastrphic events where I am 1) on the wrong side of the move and 2) do not have a stop on, so long as my loved ones have enough to pay my cremation, Im happy. Meanwhile the family is happy, the broker is happy, the IRS is happy. It's all good as long as I am flat and (almost always) happy at end of day, everyday. Osorico
You make some very valid points and I appreciate your position. It comes down to this....my blow up risk is offset by my win rate and the profits I've taken out of the market over several years. So I do know what my risk is, I do accept the fact that I'm human, and I do have the ability to start over. If that day ever occurs I will start over without using stops. I just do what works.
fair enough. i'm a big student of game theory. so, that's how i developed my trading style. it's discretionary, but it's also grounded in statistics. i am NOT saying your style cannot work. i am saying that imo (and imo the math backs me up) styles like yours can and do work but expose traders to risks that are out of proportion to the benefits. anecdotally, i have heard WAY too many examples of traders using similar styles to your blowing up due to a few bad trades. one of the primary things i remember is that the market is NOT gaussian protective stops ALWAYS lower the winning percentage of any system... the 2nd is why it is so tempting to use mental stops. and ADDING contracts @ "losing points' will ALSO raise the winning percentage. neither of these are compelling reasons to do so because risk is magnified significantly, and this methodology will result in much larger losses per losing trade but we can agree to disagree.
I am doing combination of both physical and mental stops. I generally put a wide stop(atleast twice the mental stop) to protect against catastrophic events. Then depending upon the price action/technical, I use my mental stop to exit the position.
If you can read order flow and you time your entries and only go for 2 or 3 tic targets you can get away without a stop. Watch for bigger orders and just piggy-back with them. Don't jump in, in front of the bluffers. Only go of actual orders. Do it in your paper trader first.