If I trade ES and use 1 point stop loss, what are the pros and cons?

Nexen · May 3, 2009

Quote from AAAintheBeltway:

Deciding on the optimal stop size is dependent on a number of factors. What is right for one trader will not work for another. Personally, I like to use a mental stop as disaster insurance rather than as a routine exit. Ideally, I would be out of a dubious trade before the stop was triggered.

This is where backtesting software can be very useful. You can vary the stop size and see how it affects profitability. For most any type of intraday entry signal, there is a point that winning trades almost never go. In other words, a winning trade tends to go against you by only so much. This is called maximum adverse excursion or MAE. Some s/w, like Wealthlab, will display MAE for your system and you can see the tradeoff between win percentage, biggest loss and profitability.

Obviously, different entry signals will expose one to varying levels of MAE. Time of day, market volatility, data releases, etc all come into play as well. If you have to use a very tight stop, you will probably need to restrict your trading to less volatile times. A one point stop would be pointless immediately after a FED release for example.

The idea that small stop levels reduce risk is illusory. They might reduce the exposure on any particular trade, but over time they tend to reduce profitability, both by increased numbers of losing trades and by knocking you out of potential big winners.
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Thank you for taking the time to write that post.

Nexen

jaymac21 · May 13, 2009

I seriously beg to differ. I consistently use 1-1.5 pt stops on scalping with a trarget limit of the same. IF you are good at your technicals and can time reversals, it is a very profitable strategy. I hit over 75 percent on my ES scalp trades. And I use even a less stop (.50-.75) when I trade at night. IF you practice and you can time your reversals. YOu can be highly profitable. IF anyone tells you that using tight stop losses is a bad idea, they need to go read a book.

jaymac21 · May 13, 2009

funny how all the people telling you that 1 point stops dont work are such newbies in the game. been doing this for 10 years now. just makes me sick when i hear bad advice

flipflopper · May 13, 2009

Pros:

It will take you longer to lose your money.

Cons:

You will lose all your money.

In all seriousness the way you calculate a stop is based on volatility and average true range. It is not just some arbitrary number!!!

Feasibly a one point stop could be appropriate is you use a very small time frame and the market has NO volatility aka summer trade and shortened weeks. Most pro don't trade at those times.

Shagi · May 13, 2009

Quote from the1:

No one can consistently time the ES within a one point margin of error. Any system that uses a 1 point stop is destined to fail. Those who do not understand the theory of randomness are destined to get ruined by it.
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Not really - If you use a 1point stop - the trick is re-enter again and again until you hit the trend. So if get stopped out 4times thats only $200 loss and go for the home run 10 pointers. Presto

AAAintheBeltway · May 13, 2009

Quote from jaymac21:

I seriously beg to differ. I consistently use 1-1.5 pt stops on scalping with a trarget limit of the same. IF you are good at your technicals and can time reversals, it is a very profitable strategy. I hit over 75 percent on my ES scalp trades. And I use even a less stop (.50-.75) when I trade at night. IF you practice and you can time your reversals. YOu can be highly profitable. IF anyone tells you that using tight stop losses is a bad idea, they need to go read a book.
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I suggested to the OP that he do some backtesting and see for himself how stop levels affect profitablility. You might want to do the same. I have never seen an intraday Es system that was profitable over any significant length of time, and I highly doubt that an approach based on 75% wins using 100 point stops will be successful. Congratulations to you if you have been successful, but I would suggest you quit now before you give it all back.

jaymac21 · May 13, 2009

From the sound of you you are not much of an intraday trader. or trader at that. even when i daytrade equities i hit 3 out of 4. i have no idea what you are talking about. are you the type of trader that loses 10 but hits that one jackpot and breaks even? Im consistent and i profit with 1 point stops. everyone should have their own method of trading that works and if someone is going to shoot it down like they are the trading gods, then i am quite sorry for them

jaymac21 · May 13, 2009

and i agree 100% that an es "system" using 100pt stops would NOT be profitable.. 1pt on the other hand....

reiehaxm · May 13, 2009

Personally use 4 tick ES stops and 10 tick YM stops. Profitable nearly every day. Dont need more than that to realize I'm wrong.

Million ways to trade. Find out what works for you.

AAAintheBeltway · May 13, 2009

Quote from jaymac21:

From the sound of you you are not much of an intraday trader. or trader at that. even when i daytrade equities i hit 3 out of 4. i have no idea what you are talking about. are you the type of trader that loses 10 but hits that one jackpot and breaks even? Im consistent and i profit with 1 point stops. everyone should have their own method of trading that works and if someone is going to shoot it down like they are the trading gods, then i am quite sorry for them
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I don't know why you're so hostile, except for the fact that you may be a papertrader trying to sound bigtime. You don't even know the terminology. Whatever.

We all know that any loudmouth can come on here and claim to be Paul Tudor Jones (he's a famous S&P trader, since you probably never heard of him either), but I hate to see newbies take it seriously and lose their money.

My advice to anyone: do your backtesting and see for yourself the effect of stop loss levels on profitablility. One of the other things you will learn is that win/loss percentage is one of the least important stats.