stops - 'noise' and volatility

Discussion in 'Index Futures' started by paulus, May 19, 2003.

  1. paulus



    I've started trading futures (ES) about 6 months ago and so still developping a trading system; in this respect I have 2 questions :
    a) how can one define stops just above the so called 'noise-level'
    but tight enough to avoid large losses ?
    b) how can one to define a stop taking into account the daily
    volatility ? based on ATR -> ES-mini

  2. a) by watching the market depth you will eventually be able to find appropriate stops

    b) if you are thinking of using the daily ATR it varies depending on the lookback -- longterm ~ 1 month or so is about 13.85 pts. right now, intermediate term ~ 2 weeks is 14 pts. and short term ~ 1 week is 18.55 pts.

  3. paulus



    a) could you please explain how market depth relates to noise
    b) where can i find those figures and how should one apply them
    in defining a stoploss ?

  4. a) imagine you are in a trade (a thought experiment) either long or short and you have your entry price in mind. how far against you does the market go before hitting your profit target? if you keep a running total of how many points the market goes against you before turning your way you should be able to average that into a reasonable stop/loss.

    b) those were my figures for today. standard charting software provides the atr calculation. if you are trading a swing system or are playing breakouts using say about half the range or some other percentage might fit your style of trading.

  5. Why don't you spreadsheet you Maximum Adverse price and Maximum Favorable price excursions and develop the character of your set up?

    Michael B.
  6. ESavant -- there it is Maximum Adverse Excursion by John Sweeney. Well, worth the price and the study, imo.

  7. paulus



    As i told you i am a nembie ..

    So i would be more than happy if you could explain that to me ...


    basically, i am trying to start daytrading and therefore develop
    a system with a 'workable' stoploss
  8. Magna

    Magna Administrator

    A workable stoploss depends on many factors, and is not an easily answerable question. It depends on the timeframe of your trading strategies -- that is, setups based on the 15m chart will have different stops than setups based on the 1m chart. It depends on your targets -- that is, if your setups target 6 pts then they will probably have different stops than setups that targets 2 pts. It depends on your account size and position sizing. It depends, it depends, it depends....

    To determine noise (a relative concept because 5 pt moves might be "noise" to a swingtrader) watch the chart in the timeframe in which you find and place your trades. After a short while it will become obvious what is noise in that timeframe, and what is outside the noise.
  9. bidixon.......thanks I will get it a book? or at his website?


    My interpretation of an excursion is the place that the price takes you statistically after your entry and exit.

    Draw your lines in the sand with your system calls.....then see what happened after you entered and exited. Chart this on a piece of graph paper or an Excel spreadsheet. This will give you a clue as to what to expect from your setup. Imagine if you could capture the BEST possible Entry and Exit after you get a set up. You would be in great shape if you had a good system. But we all know that you could not possibly enter and exit perfectly at the highest/lowest point. But you need to know what the "perfect is"to calibrate your stop and target. Your technique of calibration could be a comparison of your excursions to something else like range for example. I do not know I got to get that book Bdixon is talking about. I currently compare it to Range and Time.

    Michael B.
  10. You could also calculate from that probability tables relating to different levels, and further enhance your strategy from there, based upon getting higher probability trades with smaller stops and bigger targets less often, and thus reducing your level of risk involved in the trade itself, while maintaining the same overall profitability.

    It's never going to the best entry/exit point, more a trade off of getting a good entry/exit with a high probability of both being hit in the same move, and measures for target failure that still provide for a profitable trade.

    #10     May 19, 2003