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how to set stop for spreads trading

This is a discussion on how to set stop for spreads trading within the Spreads Trading forums, part of the Styles & Strategies category; fixed fraction of capital ? any other methods?...

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Old Mar 6, 2009, 12:24pm   #1
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how to set stop for spreads trading
fixed fraction of capital ? any other methods?
Last edited by quickg; Mar 6, 2009 at 12:39pm.
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Old Mar 6, 2009, 1:49pm   #2
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Set stops where you are wrong about getting into the trade and adjust size accordingly. Applies to spread trades too.
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Old May 1, 2009, 9:26am   #3
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It is critical to have a game plan that includes exit strategies. I don’t like to assign fixed dollar or percentages to my stops because every asset and every situation is different. I use major trendlines, moving avereages and horizontal support/resistance as my guides. In essence, these breaches force me to admit when I am wrong and I have to exit the trade. I have written many articles on stops. Please use the search feature in my blog and enter keyword “stops”.
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Old May 16, 2009, 9:38pm   #4
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trailing stops
Try using Wells Wilder’s “Parabolic,” as a trailing stop, except when a cycle is due. It runs to close for cycle peaks. See if it is not simpler and gets great results.

Use the new signal to average up.
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Parabolic Time/Price
The Parabolic Time/Price System, developed by Welles Wilder, is used to set trailing price stops and is sometimes referred to as the "SAR" (stop-and-reversal), Parabolic SAR is more popular for setting stops than for establishing direction or trend. Wilder recommended establishing the trend first, and then trading with Parabolic SAR in the direction of the trend. If the trend is up, buy when the indicator moves below the price. If the trend is down, sell when the indicator moves above the price.

The formula is quite complex and beyond the scope of this definition, but interpretation is relatively straightforward. The dotted lines below the price establish the trailing stop for a long position and the lines above establish the trailing stop for a short position. At the beginning of the move, the Parabolic SAR will provide a greater cushion between the price and the trailing stop. As the move gets underway, the distance between the price and the indicator will shrink, thus making for a tighter stop-loss as the price moves in a favorable direction.

If you are long (i.e., the price is above the SAR), the SAR will move up every day, regardless of the direction the price is moving. The amount the SAR moves up depends on the amount that prices move.

There are two variables: the step and the maximum step. The higher the step is set, the more sensitive the indicator will be to price changes. If the step is set too high, the indicator will fluctuate above and below the price too often, making interpretation difficult. The maximum step controls the adjustment of the SAR as the price moves. The lower the maximum step is set, the further the trailing stop will be from the price. Wilder recommends setting the step at .02 and the maximum step at .20.

For additional information along with the calculation please refer to "New Concepts in Technical Trading Systems" by Welles Wilder.
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Old Jun 2, 2009, 11:15am   #5
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Originally Posted by quickg View Post
fixed fraction of capital ? any other methods?
Quickg were you thinking solely about setting stops or momey management overall for spreadtrading?

I've very new to spreadtrading (currently waiting for some ordered books to be delivered so i can learn more), and one of my areas of thought has been about money management issues and position sizing.

Given that spreads tend to be lower risk that outrights, does this mean a trader can use a greater portion of capital (and so risk a greater portion) for each trade whilst still keeping a sensible and sustainable money management regime in place?

Have any experienced spreadtraders got any advice?
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Old Jun 4, 2009, 3:49am   #6
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Lightbulb Position sizing
First off you are already hedged. You are long and short preferably in the same commodity.
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Given that spreads tend to be lower risk that outrights, does this mean a trader can use a greater portion of capital (and so risk a greater portion) for each trade whilst still keeping a sensible and sustainable money management regime in place?
Currently I have a position on in Bean Oil. Margin is about $200 us. If I was trading double margins that would be $400 per spread. I have suggested keeping $1,000.00 per spread for trading.

Using a multiple of margin has the advantage of volatility being a part of the equation. People who have money on the line in your trade produce margin requirements.

Last October Andy Jorden wrote:
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I don't think I understand the question.

First, I don't know what the margin or double margin has to do with the risk. Why not using 1/2 or 1/4 of the margin?

Second, why using 1% of your margin account and not 3%, 6% or more to define the risk you are willing to take on each trade.

As you can see, it all depends on your own parameters.

I am not sure if you really need a $200,000 or $400,000 dollar account to take a risk of $2,000.

All you really NEED is the margin. All the rest is up to the money management of each trader.

Andy
This is money management. Keep it simple you are already hedged. Stops are “close only,” stops, based on weather or not prices are following the seasonal pattern.

When they are following the pattern build a position, when they are not following the pattern reduce the position.

Why complicate something so simple?

Your risk is your stop plus slippage. You have no way of knowing where the next trade will actually be. The exchange thinks it will be within the range of required margin.

1 Use Mony you can afford to lose
Playing with the houses chips gives you more freedom.

2 Start small
One calendar spread per $1,000.00 equity.

Look here is the thing. When you trade spreads, the return on margins can easily give you back your original capital on successful trades. Just move cautiously until you can take your original capital out. Then pad your margins and trade your experience.

Spread Trading Rules
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Old Jun 11, 2009, 9:37am   #7
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Hi Gold Trader
Thanks for the reply.
I understand that a spread trade is hedged by it’s very nature and what you are saying re stop placement. I also agree with your point about starting small. But there are a few things I’m not clear on.

1. It’s clear what is at risk on a single leg position, the gap to your stop loss at best and your entire stake at worse. But in spread trading, it’s not so straight forward for a novice to assess the level and size of risk. Is there anyway you could shed some light on this?

2. On money management, you say to start with $1000 on a single spread trade. Should a spreadtrader utilise the same short of money management techniques as an outright position trader, or being that a spread is implicitly hedged, should a spreadtrader take advantage of this and place a higher percentage of their overall trading capital on each spread they trade? If so, what kind of models do new (and experienced) spreadtraders use?

Regards
Syn
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Old Jun 12, 2009, 9:57am   #8
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Lightbulb True Risk is unknowable
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It’s clear what is at risk on a single leg position,
How can you know where you will be filled, it could be at a better price?

You do not know your true risk on any one trade. You can get an idea overall, looking at a lot of data. But you cannot know ahead of time how the next trade will be filled. So you do not know your risk.
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the gap to your stop loss at best and your entire stake at worse.
The worst is losing your position. Getting stopped out just before the market goes limit up for nine days. When you are liquidating do not underestimate unexpected slippage. There is no reverse slippage, slip is never in your favor.
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But in spread trading, it’s not so straightforward for a novice to assess the level and size of risk.
Still the same. Look at a chart and use stop plus slippage as the risk. Who ever suggested the spread, should have given you a last chance desperate get me out stop. Use one closer. When you get in on Stochastic, within a week parabolic should work well as a trailing stop on calendar spreads.

Risk is one thing, margin is another. Basically the risk of exiting a trade is unknowable ahead of time. Margin is how much your partner in this game wants to cover their risk. Margin is knowable.
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2. On money management, you say to start with $1000 on a single spread trade.
Well some multiple of margin is a good idea. Low risk calendar spreads are often under a thousand margin per spread. On something like grains where the margin required can be under a $100.00 you might run a little less.
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Should a spread trader utilize the same sort of money management techniques as an outright position trader?
While most traders sometimes find themselves in a spread position. Spread traders in general should not even think about trading outrights. It requires a reckless do or die mentality that is unlike milking the markets, for long term gains. Overall outrights a do not compare to spreads on return on margin (Rom). Don’t trade outrights, if you can help it.
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being that a spread is implicitly hedged, should a spread trader take advantage of this?
Yes, take advantage of the low margins and the higher return on margin offered by seasonal calendar spreads.
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If so, what kind of models do spread traders use?
How much unused capital is in my account this morning?
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