Stops If a system has a high frequency of trades (and any daytrading system has this charachter), tight stops usually work best. Systems that trade frequently are trying to make money almost on a daily basis. If the system takes a small loss, then there is always tomorrow; why take a major loss when you know a trade probably will be generated tomorrow? Moreover, professional traders are well aware of how difficult it is to recover from drawdowns. A 50% loss requires a 100% return just to get back to break even. See here, % loss and % gain necessary to break even. 10% 11.11% 20% 25.00% 30% 42.85% 40% 66.66% 50% 100% 60% 150% 70% 233% 80% 400% 90% 900% 100% broke Profit targets Pure profit targets generally don't work. A good portion of the profit that is generated by an S&P day-trading system comes from those days when the S&P takes off and keeps going in the same direction. If you limit these potential high-profit days, then you limit the overall profitability (if any) of your system. 80% of your Profits will come from 20% of your trades (Pareto Principle: in any series of elements, a small fraction in terms of numbers always accounts for a large fraction in terms of effect).
Nice reply. I love great dialogue. Heres my point. If you are upside down on your Risk Reward (RR) then you inturn will have a higher degree of trade opportunities. When you limit your strategy to only 3:1 you will have in essence limited yourself from achieving many great trading opportunities. Now I'm not referring here to YOU personally because I dont know your system. However, research shows that shorter term time frame trade accuracy is harder to achieve over the long term because you have to break down the major trend into a microcosm of tick movement.......(FOOT in MOUTH on my part because I don incorporate short term trading into my overall strategy)......If that is the only strategy or trading reference point ...........then YOU (not you personally) are DEAD in the water and floating upside down with a HUGE drawdown over time. Multiple small losses equal one big loss!
Good point. Bad principle. "I always buck the trend of intellegent notions". - T-REX That sounds great on paper but in theory.......its FALSE!!! Hindsite is 20/20. We as traders only know of a developing trend only AFTER it has developed. We never know in advance the magnatude of a move until after we are in it. That is why I use a 3pt profit target on "ALL" trades. NOTE: This 3pt profit target is not necessarily placed in the market as a working order but rather as a target point in which I will definately move my initial stop-loss to break even. In cases where I'm not able to watch the market for whatever reason I WILL place the 3pt target as a working order to get me out at profit. You must be flexible in this game!
For those interested to play with simulated equity curves http://hquotes.com/tradehard/simulator.html