Hey spreadem, I used to like to give my trades some "room", so I would use loose stops. All it accomplished was that it made me lose money faster. When you're wrong on the direction of the trade, you're wrong, and a larger stop just means that your next trade has to win even more to break even. Nearly all trading systems lose money because they cannot reconcile the emotional aspect of trading. When you are in a choppy trading range, you will be taken to the cleaners. When you are in a trade and the market is going against you, and you are already down $1000 and it looks like the market will keep going against you, odds are your emotions will cause you to bail out before your losses get even larger. Not to discourage the original poster, but I would try to develop an intuition, or at least a good feel for "timing" the trade. If you enter a trade and you find yourself in the hole most of the time right out of the gate, your timing is off. This will grind away at your emotions until you start trading foolishly. When I enter a fast market like ES, my NUMBER ONE priority is to move my stop to break even as quickly as possible. I get stopped out more often sure, but the trade is free. But I don't miss the big moves.
logikos, unfortunately, i tend to agree with spreadem, unless all you're doing is scalping. using wider stops give you the chance to see where a market is moving, and let's your trade develop. no one is going to be right every time on the direction of the market, on the next tick, so you have to let your trades develop a bit anyway. there are plenty of trading systems that make money, but you have to identify what kind of trader you are first, and know what your limitations are in terms of holding time, drawdown, etc. if you're looking to get into a trade to breakeven, why would you trade at all? you've got to sit in a trade (with proper stops) to let it prove that you were right to begin. if you were wrong, ok, then you're out at your stop. but not staying in the winning trade is where most traders will get the most frustrated since its where a good chunk of your profits come from (as opposed to just being right frequently - large winning trades make up for lots of small losers). Pete
Trader Pete, you make valid points, but in today's market conditions, where the stock market, thus the indices, are stuck in a trading range, what are the chances of a big, sustained move in any direction? If you lose 3 $1000 trades in a row trying to trade a non-trending market, desperation may start to set in, causing the trader to possibly take a foolish trade to try to win back the money. I'm not advocating scalping, but rather advocating keeping losses as small as possible so when the market does take a big, multi-day advance (or decline), the profit will do more than just cover a series of big losses, but rather built equity. The scalping you refer to is better coined a "filter." If you enter a trade and you become profitable and you move your stops to breakeven, there is a great peace. If it runs, let it go where it may, but you know the worst you can do it breakeven. It's better than watching wins turn to losses and getting discouraged. Have a great trading day!
very true about the market being a bit range-bound. but wait, 3 x $1000 losses on the SP emini is 3 x 20 point losses. if the market is moving 20 points, i'd call that a small trend, wouldn't you? i think that you're thought process is correct, but should be stated to include that trailing stops might be the best way to scale out of a winning trade. trends don't always have to be the NASDAQ going from 900 to 5000 over the course of 18 months - it can be a simple shorter-term trend on the SP for instance that moves from 880 - 910. Pete
Pete, took a look at the daily chart of ESM3. Since the middle of March, by standard technical analysis, one can say that the market is in an uptrend, or at least producing an ascending triangle pattern. But looking closely at the chart, you can determine that the mean price over the course of the last few months is around 880. The market has poked around 900 a few times and also 860. Anything above 900 or below 860 has not been sustained (except maybe last week going into today where a upside breakout looks at least somewhat promising. But even then you know there are many traders waiting to fade it). So, at least for the last few months, 20 points around the mean is about all the trader has to play with. Even if they generated only one $1000 loss during this time, trying to breakeven or become profitable after the next trade becomes quite a feat. He also may be tempted to make smaller winning trades to make up for the big loss, but that is self-defeating as you probably know. The only point I am trying to make is that it is better to avoid the big loss in the first place. After a couple of them, even the most steel-balled trader begins to doubt the system and find themselves fudging with it.
That is why your stops (amount of $ risked) should be no more than 1% of your trading equity. If your stops represent $100, then you'll need at least $10,000 to trade that system. Less than that and you have a good chance of blowing up. Your second problem is that "loose stops" are probably more realistic of the type of stops that you ought to be using. If you can't afford these "loose stops" either cut back on the number of positions you are trading of find another trading vehicle. That's why it suicidal to think that you can trade on a shoestring.