Target of 10 points

[Splitlink]

Is it really ?

Let give you a scenario to think about. Trader A and trader B both trade the same underlying and with the same directional succes rate. Both exit when a profit of 10 points has been achieved. But trader A uses a 5 point stop, trader B uses a 10 point stop. Who makes the most profit ?

And try not to embarrass yourself here.

One trade does not count. Several trades do and it is generally understood, correctly, IMO, that most trades are losers. Therefore over, say, ten trades, a 5 point stop will get you out of a bad trade earlier. You can then do what you like- you are out. Follow it down and get back at a lower price or just forget the idea and go for something else. I said earlier that I thought that a 1:1 ratio was not good enough, don't forget the commision, spread, etc.

Socrates puts it so delicately, sometimes, doesn't he? Don't worry, though, he and I don't always see eye to eye, either.

Split

 

[counter_violent]

Can anyone point me in the direction of the "Weekend Argument Thread" , this thread cannot be it , although there is still time !

C V

 

[badtrader]

One trade does not count. Several trades do and it is generally understood, correctly, IMO, that most trades are losers. Therefore over, say, ten trades, a 5 point stop will get you out of a bad trade earlier. You can then do what you like- you are out. Follow it down and get back at a lower price or just forget the idea and go for something else. I said earlier that I thought that a 1:1 ratio was not good enough, don't forget the commision, spread, etc.

Socrates puts it so delicately, sometimes, doesn't he? Don't worry, though, he and I don't always see eye to eye, either.

Split

Commission only cost half a tick, on the mini Russell. you say if you get stop out with a 5 point stop, this will get you out of bad trades. I have been in trades where it has gone against me 9 points and went on to make 10 points. if I got stop out on 5 ticks I would have missed it.

 

[Profitaker]

Profitaker - are you sure about this?

I am absolutely certain. If the probability of a stoploss of – 5 points being hit is X% then the probability of a stop of -10 points being hit is 2x X% . (If you want the exact % probs, give me the volatility and time period). So over many trades the 5 point stoploss will be hit twice as frequently as the 10 point stoploss but with half the damage, whereas the 10 point stoploss will be hit half as frequently as the 5 point stop but with twice the damage. Come on guys, this isn’t rocket science !

The value of expected P&L for trader A and trader B will be exactly the same. Only the frequency of losses is different.

I agree that this answer is correct in a random market…..

Yes, a random market was the assumption, and must be when comparing strategies.

 

[badtrader]

I am absolutely certain. If the probability of a stoploss of – 5 points being hit is X% then the probability of a stop of -10 points being hit is 2x X% . (If you want the exact % probs, give me the volatility and time period). So over many trades the 5 point stoploss will be hit twice as frequently as the 10 point stoploss but with half the damage, whereas the 10 point stoploss will be hit half as frequently as the 5 point stop but with twice the damage. Come on guys, this isn’t rocket science !

The value of expected P&L for trader A and trader B will be exactly the same. Only the frequency of losses is different.
Yes, a random market was the assumption, and must be when comparing strategies.

I would say the avr volatility is around 6 points on the time frame I am trading. Remember though as soon as the market hits 5 points I move stop to even. still the same target 10 and stop 10

 

[fxmarkets]

In the end you may settle for a stop of 5 but not the reward of 10 simply because you realise that its going beyond x multiple and I need to be less concerned with actively trading(assuming new risk/scalps) for the sake of being busy with it . Of course you enjoy it.... but I mean if you want to scalp be busy working out how to get (if it has to be a 10 point fixation...) an entry where the risk is nowhere near 10. the lower the better ? of course.... can it be done? up to you /all of us mate...

 

[c6ackp]

Yes, a random market was the assumption

aha! we agree then

anybody else think the market is random? this is a purely academic/hypothetical analysis - sounds like a GCSE ecomonics question/answer to me - nothing to do with the real world

this sounds like something a quant or analyst would come out with, not a trader (please don't take offence, just IMHO)

Steve

 

[badtrader]

aha! we agree then

anybody else think the market is random? this is a purely academic/hypothetical analysis - sounds like a GCSE ecomonics question/answer to me - nothing to do with the real world

this sounds like something a quant or analyst would come out with, not a trader (please don't take offence, just IMHO)

Steve

Under the Efficient Market Hypothesis, any time you buy and sell you're engaging in a game of chance, not skill. If markets are efficient and current prices always reflect all information, there's no way you ever be able to buy a stock at a bargain price

The end results of the Efficient Market Hypothesis and Random Walk Theory are controversial. If you can't predict stock prices, and picking stocks is really a matter of luck, how are we supposed to invest? And what are all those people on Wall Street doing, anyway? So the flip of a coin will work just as good,as long you got good money management.

 

[silviaic]

aha! we agree then

anybody else think the market is random?

What do you mean by random?

Silvia.

 

[frugi]

I am absolutely certain. If the probability of a stoploss of – 5 points being hit is X% then the probability of a stop of -10 points being hit is 2x X%

I think you mean 5 points X%, 10 points 1/2(X%) as it would have to trade through the 5 point stop to reach the 10.

e.g 30% chance of 5 point stop being bit; 15% chance of 10 point stop being hit?

Seductive, but imho not true.

In my view it depends on where the stop is placed in relation to market structure. For instance, if you (foolishly) decided to take entries 6 points from a previous, close support level when the market is selling off, then the probability of being stopped out on 5 points would be high as your stop would be 1 point above previous support, while the chance of being stopped out in the same scenario on a 10 point stop would be considerably less than half this.

Besides, the market isn't random and volatility is a historical measure.
*dons flame suit, digs out Paulos and Taleb again*

Oh look they're having a chat about this in the other place.
http://www.elitetrader.com/vb/showthread.php?s=&threadid=58195

 

[commanderco]

You are quite right Frugi, it is all about structure.
I had given up on this thread until you came along and threw "structure" into the pot.

If people cannot or willnot see the structure in the price, trading will always depend
on money management and words like random, efficent, coin toss, gambling
will be thrown about with gay abandon.

Much will be said and with great conviction.
But if anyone is trading the mini Russell on a handfull of lots or less, then they have failed to convince themselves and they eventually wind up as "dog tucker" either because they failed to get their trading off the ground or they "maxed out their account"

 

[Splitlink]

Commission only cost half a tick, on the mini Russell. you say if you get stop out with a 5 point stop, this will get you out of bad trades. I have been in trades where it has gone against me 9 points and went on to make 10 points. if I got stop out on 5 ticks I would have missed it.

Well, each one to his own. If you had been stopped out at 5 points and got back in 4 points lower you would have been 14 points to the good. This is only theoretical, in practice the profit would be less, probably but ,still, it is a valid argument. In addition, you were a hair from being stopped at 10 points, weren't you? In my book, the risk does not compensate the reward or the waste of time.

Split

 

[Bigbusiness]

aha! we agree then

anybody else think the market is random? this is a purely academic/hypothetical analysis - sounds like a GCSE ecomonics question/answer to me - nothing to do with the real world

this sounds like something a quant or analyst would come out with, not a trader (please don't take offence, just IMHO)

Steve

On an intra-day time frame, the markets are not random. If they were, the highs and lows of the day would be evenly distributed. I remember reading that the high and low of the day is far more likely to occur in the first and last hour of trading. That wouldn't happen with a random market.

On the longer time frames, the bell curve for stock markets has fat tails. This means that the markets move to extremes more often than they would if they were random. Have a look at Benoit Mandelbrot's 'The (mis)behaviour of markets for a more eloquent explanation.

 

[JumpOff]

One trade does not count. Several trades do and it is generally understood, correctly, IMO, that most trades are losers. ...

ouch. This sounds like a slow grind down to the bottom of a trading account, no matter what size stop is used. Isn't the goal to make good entries? Good entry = one that has a potential to really motor along for a while, and upon opening, takes an almost immediate hop into b.e. + a few pips, and then leaves you with management decisions to be made from a position of strength. Entries with positive expectancy are simply easier to manage.

One thing I noticed about traders who have good entries 3/4 times or better? They are enjoying themselves, not worrying about the size and position of their stops.

JO

 

[Profitaker]

e.g 30% chance of 5 point stop being bit; 15% chance of 10 point stop being hit?

Seductive, but imho not true.

Yes, 1 over 2, or twice as unlikely, thanks Frugi. I'm fairly confident that if you analyse the market in which you trade you'll find exactly that - a normal distribution.

How else would you measure the relative probabilities of a 5 point stop Vs a 10 point stop being hit, without being subjective ?

Efficient markets / randomness / inefficent markets / predictabilty / might justify another thread. You mention Taleb - a very interesting guy IMHO.

 

[badtrader]

When this thread dies, I will give another target and stop placements. did you know some times you are better off not using stops, but that's for another thread later on. 1 step at the time

 

[bulldozer]

When this thread dies, I will give another target and stop placements. did you know some times you are better off not using stops, but that's for another thread later on. 1 step at the time

=========================================================================

Bt,

i totaly agree wiv your points!! But i will add an extra bit to your tips. Your also better off if you stop SB trading and get into another form of trading!

SB is bad for ones health!! FACT or NOT?? TRUE or FALSE?

Bull

 

[commanderco]

When this thread dies, I will give another target and stop placements. did you know some times you are better off not using stops, but that's for another thread later on. 1 step at the time

I used to trade without stops and just manage the trade. It taught me a completely different way of seeing things and made money for me but I came to realise that it was a tough way of increasing lots.
Now I trade brackets ... the stop & target go in with the entry. I might move the stop in my favour, but never against and I might extend the target, but always as a bracket with the stop.
My concerns now are how to chase the ask if I am buying, or the bid if I am selling and always my concern is for the bid/ask.

 

[badtrader]

=========================================================================

Bt,

i totaly agree wiv your points!! But i will add an extra bit to your tips. Your also better off if you stop SB trading and get into another form of trading!

SB is bad for ones health!! FACT or NOT?? TRUE or FALSE?

Bull

I use Berkeley futures for my futures trading, But I do use spread bets for forx.I use 1 for shorts and another for my long trades.so they dont make it difficult for me

 

[Splitlink]

ouch. This sounds like a slow grind down to the bottom of a trading account, no matter what size stop is used. Isn't the goal to make good entries? Good entry = one that has a potential to really motor along for a while, and upon opening, takes an almost immediate hop into b.e. + a few pips, and then leaves you with management decisions to be made from a position of strength. Entries with positive expectancy are simply easier to manage.

One thing I noticed about traders who have good entries 3/4 times or better? They are enjoying themselves, not worrying about the size and position of their stops.

JO

Ok. Good entries like the ones you describe. What do you want 10 point stops for? The sooner that the trade is exited once seen that it is not working, the better.

Good traders can't know whether they are in a good trade or not until they are into profit. Do you think that they never have bad ones or that they stay in them for long?

By the way. As has been mentioned already, 5 and 10 points is purely for argument's sake, in this case. The distance the stop is away depends on the instrument that one is trading.and one's previous experience of it.

Also, my original doubts were about the risk/reward factor of 1:1. Yours of 3-4:1 is a different matter. I had a trade with BP recently that gave me 20 points. That's 4:1 using 5 point risk. I had another one last week with HBOS for 26.8, or better than 5:1. That's better than 2:1 and 2.5:1 using a 10 point risk. I have a good cushion against some losses. That's how I look at it, anyway.

Good trading

Split