In another thread, someone had a link to an article that talked about fish and ponds and related it back to trading. One sentence from this article caught my eye. While talking about trading from the daily charts, the author said: "Can you handle the big swings in price? Can you watch your stock drop 3 points, while waiting for it to gain 9?" This concept has been perplexing me lately. If I enter a position which drops 3 points, doesn't that mean my entry was wrong, regardless of whether or not it gains 9? I think the key is to enter as it's gaining 9, not as it is losing 3. This also goes for the loose stops theory. Setting loose stops so the stock will have some room to move before going in the desired direction seems like an acceptance of a less than optimal entry.
also in the article, it mentions the analogy of who feeds off of whom. in every timeframe there is a given set of noise parameters that is largely due to trading occurring the immediate lower timeframe. this 'noise' is exactly how the 2min traders 'feed' off of the 5min traders, and so on. good risk management takes this into account, and allows the proper trade to develop; this is exactly why you should never be trading in the vacuum of only 1 timeframe, no matter what strategy you employ. you should always know where you are in the food chain, and be aware of who is doing what -- both above and below you!
I get out of it a 1:3 risk/loss ratio. I do not know if that was the point....but how could you always catch the maximum adverse excursion? Michael B.
If you use a channel breakout system then stops like this are used. Where the stop is placed at the lower boundary of channel. Long term trend following system need to have wide stops to ensure you catch huge profit when you are right.
right, that's exactly what it is. The theory goes, good entries are impossible to hit more than 50% of the time, so you compensate for that failure by using wider stops. Which then increases your loss, so you then compensate for that by increasing your target. And on and on it goes.