Couple of additional ideas. Bullish head and shoulders long at right shoulder as it's getting created, stop below head. Bearish head and shoulders short at right shoulder as it's getting created, stop above head. FoN
IMO - as far as 100% automated systems go (not discretionary or support/resistance traditional trading).......... Get away from the notion of a stop being your safety net, and use a filter that signals when a system should make a trade based on market conditions (such as volatility). Then use the stop as your ultimate safety net for Bad scenarios. Also, for systems that incorporate a stop by having algo's dedicated to stop calculation, can permit much smaller stops. Just keep the same system building skills of processing data in your head and avoiding curve fits.
In that case, automated trading is not for me. I either take entries that require but a small stop or I don't take them at all. The least amount of time I spend in heat, the better! Joe
I think this is an extremely important thread, something that I thought I "discovered", and translated into real improvements in profit factors and sharpe ratios. Your scenario above might cover my example, but what I often do is this: wait for a lower high from a day high. Then I wait for a downward short entry signal (could be straight delta from lower high or could be ema cross or could also involve volume somewhere before the day high) -- if at that point, my entry signal is less than x points from the lower high, then I enter short with the stop at the lower high + a small buffer. I have also found that placing the stop not at the lower high + buffer, but at 60% the distance from the entry signal and lower high can improve profits. There are rationales for both methods. For the first, you often see double tops made -- so you don't want to get stopped out when a double top is made and miss the huge down swing and that's why you add a small buffer to the lower high. For the second, you might argue (and I have some statistics to suggest this is the case), that if the lower high is not respected and the price recovers to more than half way from the entry signal to the lower high, then the odds are it will recover back up beyond the lower high. Anyway, I feel like I am disclosing way too much here. Of course, this alone does not make a profitable strategy -- there are other qualifiers that must be used to make the final decision of whether to enter on the signal or not.
Not everyone can trade using small stops and be consistent in their trading. With that said, it's not impossible, it's just that only the most skillful traders are able to do it. Those that can, know how to re-enter, those that can, don't add to losers, and those that can are very confident about their skills, they know they are the best, the very best. The reason is simple, the 99% laughs at them and calls them idiots, dreamers, newbies, when in fact they are doing what seems impossible for them. I know from first hand experience Crazy A is one of those virtuoso traders that can do it. I happen to know a thing or two about how to do it and it begins like this. Don't become the hunter or the hunted. Let the hunters hunt, when you know they have already been hunted, the coast is now clear. What's the mark of the hunter ? The stop runs. That's how the journey to superiority begins. ESD
A small stop applied randomly will kill your profits. Absolutely kill it. That's because a stop smaller than the 15 to 30-minute volatility will almost certainly trigger. Applying a larger stop can alleviate this problem, but an even better solution is to identify places where you don't have to set a large stop -- setups where you know it will either not hesitate and move in your favor, or if it does hesitate, you know with high probability it will move against you. I believe this is what the OP is asking for.
I think you are either not choosing your words correctly to get your point across or you are taking inappropriate risks. You should ALWAYS adjust your trading size (position size) based on your account and stop placement. This is Risk Management 101. For example if I have a $100K acct and I'm buying a stock at $100 with $2 stop loss (@$98) then assuming I want to risk 1% of my capital I can buy 500 shares ($1000 capital to risk/$2 per share = #shares to purchase = 500 shares). The further the stop loss is away from my purchase price the less shares I buy but keep my risk the same...if the stop was at $97 then I could buy 1000/3 = 333 shares MAX. FoN,... This is an interesting discussion and a valuable one. Thanks for the thread. I have found that for me I identify a trend in mutiple time frames (TF) and see how they all relate. I trade based off the longest TF. For me that is weekly. If the trend is UP I trade with an entry based off TWO TF lower...ie the 60 min TF. When I used to trade based off 1 TF lower (ie the daily TF) then I would have to set my stops too far and had small positions and when i was right I made little money. So I switched to my buy signals off the 60 Min TF and this has made a huge difference for me. Tighter stops and more shares per trade and more money made. This allows me to get in and out of positions much closer to the top or bottom. If get whipsawed a bit it is not usually significant as the 60 min TF will turn Bullish once again. I only buy when the 60 min TF is trending in the same direction as the weekly TF. I use either EMA 13 or EMA 39 as my support and place my buy orders a few pennies from there. (EMA 13 for fast moving trends and EMA 39 for more normal trends). It works really well and I usually will buy close the the bottom of a retracement. I matched up my method with yours and it seems that they both produce good buy signals but that I tend to catch a BUY before the breakout higher and can set stops even tighter than you. If it blows through my stop so be it. The times I am right far exceed the times I am wrong. Notice the attached chart with a whipsaw and stop that was hit and then a new BUY signal shortly after that.